Paying for LTC insurance: the C corporation advantage.

• Author: Bakale, Anthony
• Position: Long-term care

The risks of requiring long-term care (LTC) are substantial. Most people who want to protect their assets or choice in caregiver should consider the purchase of insurance, which can also provide tax benefits.

For individuals, the premiums on qualified LTC insurance policies are deductible within annual age-based limits; see Exhibit 1. The qualified expense is a deductible medical expense subject to the 7.5% adjusted gross income (AGI) limit. For many individuals, this translates into no benefit at all, as their total medical and dental expenses do not meet the threshold. Without a tax benefit for deducting the qualified premiums on a Federal return, some states allow a credit for a portion of premiums paid.

For self-employed individuals (including partners and more-than-2% owners of S corporations), the qualified premiums are deductible subject to a 70% limit, which is scheduled to increase to 100% in 2003. The remainder of the premium (30% in 2002) is treated as a medical expense subject to the 7.5% AGI limit.

For C corporations, the premiums are deductible without regard to the age-based limits. Premiums for spouses and dependents are also deductible; there is no requirement to provide the benefit on a nondiscriminatory basis.

Example 1: D is the sole shareholder of a C corporation with 10 employees. The business has done very well and D is proud of all the hard work he has put into this business over the past years. He has no plans to sell the business and is acutely aware of the double taxation on C profits. In an effort to avoid double taxation, D's tax adviser suggested that D fully fund his retirement plan, maximize fringe benefits, make use of a bona fide corporate loan (to the extent of any earnings and profits) and pay out the remainder in salary.

Even after implementing the recommendations, D has been paying himself an annual salary of $150,000 to eliminate any corporate-level tax. D's wife recently received a large salary increase and they now have a combined Federal and state marginal tax rate of 47%.

D and his wife are both 55. Their net worth is over $600,000, and they wish to leave as much of it as possible to their children and favorite charity. They have recently become aware of the need to shop for an LTC insurance policy.

D decides that instead of paying himself an additional $4,000 in salary, the corporation can purchase an LTC insurance policy on his behalf (and include his wife and dependents). This amount is fully...