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.
CONTINUING CARE FACILITY
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 …