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Congress's continuing care solution.


Given longer life expectancies and the ever-increasing costs of healthcare, Americans are becoming more aware of (and more concerned about) the possible consequences of their own long-term healthcare.

For many people, this analysis should involve consideration of continuing care facilities--retirement facilities that will provide both independent living quarters and long-term skilled nursing care.

Traditionally, the owner of such a facility requires a large initial deposit or entrance fee charged to the individual. Normally, the entrance fee earns no interest and may or may not be refundable. (Refundability is usually conditional, based on the death of the individual or on the facility owner's finding another resident for the living quarters.)

Obviously, if the initial payment is nonrefundable or only partially refundable, the individual runs the risk of losing a substantial amount of money and receiving little or no benefit. In addition, by transferring this money to the facility, an individual forgoes any potential earnings that could be gained on this amount.

On the other hand, if a person's payment to a facility owner is fully or partially refundable, the arrangement might be considered an interest-free loan. As such, the lender (the individual who has paid out the money) would be deemed to have received interest income and would be subject to tax on it under the below-market loan provisions of the Internal Revenue Code.

Given these consequences, many taxpayers would not consider such arrangements, even though they would best fit their retirement healthcare needs.

In 1985, Congress recognized the problems inherent in this situation and enacted Section 7872(g). Under this provision, certain payments made to continuing care facilities will not be considered below-market loans.


A qualified continuing care facility is one or more facilities designed to provide services under continuing care contracts. Substantially all the residents must be covered by these contracts and substantially all the physical plants and services must be owned or operated by the borrower (the continuing care facility).


In general, the payment arrangement with such a facility must be one in which an initial payment (and a refundable portion of it) is based on the fair market value of residential accommodations supplied by the facility. The refundable portion may be refundable either for a relatively brief period (for example, six months) or on a declining pro rata basis over a somewhat longer period.

There must be a written agreement between the individual (or married couple) and the facility that includes certain provisions:

* The retired individual or couple must be entitled to use the facility for life. * The use must involve, at least at the start, residence in a separate, independent living unit. * The facility must be obliged to provide the individual with certain "personal care" services designed to prolong a person's ability to maintain an independent residence. These include meals, maintenance of the unit and routine medical needs. * When an individual is no longer capable of living independently, the facility must be obliged to provide long-term nursing care. * These long-term nursing services must be provided at no substantial additional cost to the individual; that is, there must be a significant insurance-like element.

Note: Many continuing care contracts provide for higher monthly fees if the resident must move to a facility providing more extensive and specific medical care. There may be a question about whether such charges would be "substantial additional payments," thereby disqualifying a contract.

In addition to these requirements, the loan may not exceed $90,000 (to be adjusted for inflation after 1986), and the individual lender (or his spouse) must reach age 65 in the year in which the loan to the facility is made.

A loan from either or both members of a married couple in which only one spouse has reached 65 will qualify if both are to reside in the facility.

Nicholas J. Fiore, editor The Tax Adviser
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Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Mar 1, 1990
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