In recent meetings, I’ve been discussing new dimensions in estate planning. Legal, tax, financial, and societal changes necessitate a fresh look at this planning, and a key new consideration is how we look at, and utilize, life insurance. I’ve posited the idea that we should stop talking about the irrevocable life insurance trust (ILIT) as an estate planning solution, and instead look at it as one of many ways of implementing a life insurance strategy. Instead of assuming the use of an ILIT, I suggest a new approach to life insurance planning I call the wealth conservation and protection plan (W-CAP). A W-CAP is a simple estate planning methodology designed to preserve the client’s estate both while alive and at death. Life insurance is the underlying product used in the W-CAP approach, but the policy can be used in a variety of ways. As will be discussed, an ILIT is certainly one strategy for owning the life insurance policy, but it’s not the only ownership approach. 

Estate Planning Challenges with ILITs 

In the estate planning community, there has been some hand-wringing over the wisdom of some life insurance policies that were placed in ILITs. The debate was brought to the fore by the estate tax changes encompassed in the Tax Cuts and Jobs Act of 2017 (TCJA). Now that the individual estate tax exemption is an inflation-adjusted $11.20 million (at least until 2026), clients are asking why they can’t access the life insurance policies trapped in their trusts, and why they even need the life insurance in the first place. This is leading to requests for judicial reform of trusts, trust decanting, and even lapsing of trust-owned policies. 

Even before the TCJA, there was grumbling about ILITs. What I refer to as the “TOLI terrors” have been afflicting estate planning attorneys and corporate trustees for years. These advisors are concerned that trust-owned life insurance policies (TOLIs) aren’t performing as advertised. The policies need either more premiums than illustrated, a reduction in death benefit, or a reallocation of the underlying investment portfolio. For some trustees and/or attorneys, these troubled policies represent a source of potential fiduciary liability. Compounding the challenge is that it is difficult to explain to the client why more premiums are needed, while at the same time, the values in the insurance policy aren’t available for retirement income or to help with long-term care (LTC) expenses. Under current circumstances, the client may be more concerned with lifetime liquidity than possible estate taxes. Simply put, some ILITs are under fire both as to their utility and their risk. 

While we can question some of the histrionics we’ve seen from ILIT detractors, the underlying causes are understandable. Politicians have made such a big issue out of the “death tax” that prosperous individuals and families have gone to extremes to avoid the federal estate tax. There is little doubt that when transfer taxes are involved, ILITs are one of the best tried-and-true techniques for lowering the financial sting of these taxes. But now that estate taxes threaten a significantly smaller slice of the population, people are asking “why bother with an ILIT?” The technique severely limits the use of the life insurance policy for anything other than post-mortem needs, and it takes away the flexibility that is an otherwise positive aspect of the life insurance contract. 

A Different Approach 

So let’s take the debate off the table by approaching the issue from a different perspective. Let’s instead agree that in the estate planning context, life insurance is primarily a wealth conservation and protection tool. First, it helps conserve an estate by providing liquidity to pay taxes, pay debts, and fulfill family and business needs of the insured. Second, it helps protect an estate by offering a predictable and liquid source of capital when needed. As a non-correlated asset, it is available to shelter the estate from losses due to morbidity, mortality, and down markets. Further, if the life insurance has cash values, it can conserve and protect wealth whether that need occurs during life or at death. 

The question is how to choose and position the life insurance so as to maximize the advantages of the product in the client’s particular planning context. A Ferrari is a great car, but not if the buyer wants to use it for off-roading. A car lease works well as a financing strategy for a business owner, but may not be a good fit for a family wanting to buy a car for the long term. Choosing and positioning the product makes a difference in the value-add of the purchase. 

Consider how a life insurance policy can be chosen. Just like a car purchase, the consumer expects standard features but may desire certain add-ons to fit his or her unique situation. What are the standard features that every life insurance policy should have? Presumably the policy should provide an income-tax-free, liquid death benefit that is issued by an insurer with a solid financial rating. The policy should comply with both state and federal laws, and include standard nonforfeiture provisions. There may also be an expectation that the policy has features commonly enjoyed in modern-day insurance contracts such as a terminal-illness provision. Beyond these standard features, the advisor can both help the customer choose additional options, and determine an appropriate ownership strategy. 

What add-on features apply? It depends on the customer. I recall a car salesperson who fixated on the maximum speed of a proposed car. She was oblivious to the fact that I did not have the need for speed. This same dealer also lauded the manufacturer’s financing discount, even though I had indicated I intended to pay in cash. Similarly, the life insurance purchaser may not need, or want to pay for, features in a policy that will likely never be utilized. And even though there is a special way to position ownership of the policy, it may be moot if that particular purchaser obtains no benefit from the technique. Life insurance policies offer a myriad of riders and features, but their value depends on the client’s planning requirements. Why pay for disability waiver-of-premium when the insured is retired? Why purchase a policy with a chronic illness rider when the policy is going to reside in an ILIT? Conversely, why put the policy in an ILIT if the likelihood of incurring an estate tax is nil? 

Sometimes features and techniques with life insurance are solutions looking for a problem to solve. It’s time to change the order of the process. Particularly in the fast-changing world of estate planning, it’s time to take a new approach to planning with life insurance. 

W-CAP 

The W-CAP concept is specifically focused on the use of life insurance in estate planning. It uses life insurance to conserve and protect family wealth, whether during life or at death. The key feature of the W-CAP concept is it recognizes multiple estate planning uses for life insurance. It’s not just about estate taxes. So, while an ILIT is the primary ownership approach for avoiding estate taxes, it is not a useful approach in, for example, providing lifetime access or liquidity. In these situations, there are other ownership approaches for life insurance, including having the policy owned by the insured, a revocable trust, the spouse, or the children. These approaches may be better ways to conserve and protect a particular estate. 

The W-CAP’s four-step process focuses on what are the most important uses for the life insurance in the estate plan, and then places the ownership of the policy accordingly. 

STEP 1 

What estate planning needs is the policy primarily intended to address? Recognizing that rarely can all needs be fulfilled with one policy, part of the W-CAP process is it prioritizes the top two or three needs. Below are some of the more common needs that a life insurance policy can address, although there are certainly others: 

• Liquidity at death to pay estate taxes 
• Liquidity at death for other needs, such as a buy-sell agreement, survivor income, etc. 
• Liquidity during life for events such as long-term care or chronic illness 
• Avoiding estate and gift taxes on the death benefit 
• Avoiding income taxes on distributions of wealth Inheritance equalization 
• Creditor protection 

STEP 2 

• Once the estate planning needs for a policy have been determined and prioritized, determine which life insurance policy features are most important for addressing these needs. Below are some sample policy features that may apply: 
• Survivor-life death benefit (versus a single life policy) 
• Policy cash values in a permanent life insurance policy LTC or chronic illness riders 
• Auto-loan, reduced paid-up riders, or other anti-lapse features 
• Fixed death benefit to provide an uncorrelated asset for the estate 
• A variable death benefit to reflect market changes 
• The ability to switch between an increasing death benefit and a level death benefit Insurance company one-year term rates to use in lieu of Table 2001 rates (to accommodate split-dollar funding) 

STEP 3 

Choose the life insurance policy that best matches up the policy features (Step 2) with the primary estate planning priorities (Step 1). In other words, select a policy with provisions that can most effectively fulfill the top estate planning goals for the life insurance. This is an area where the advice of a life insurance professional is particularly important. 

STEP 4

Determine the appropriate ownership structure for the policy that will most effectively conserve and protect the estate. In estate planning, the primary ownership structures for life insurance are the following: 

• Ownership by the insured or the insured’s living trust 
• Ownership by an ILIT 
• Ownership by family members, such as the spouse or children 

Two Examples

The point of the W-CAP approach is that life insurance in estate planning is focused on conserving and protecting an estate. An LTC rider may or may not be needed; a trust may or not be required—it all depends on the needs of the client. Using the four steps above will help both determine the appropriate insurance product, and select an ownership strategy to fulfill the primary planning needs. Consider the following two examples of the use of the W-CAP approach. One is in a high-net-worth family situation, and the other involves a more moderate estate. 

SCENARIO 1 

Ruby, a widow who has a $20 million estate, has three children and five grandchildren. She recently gifted her profitable business to her daughter, the one child who is active in the business. Ruby wants to make sure the other children are also provided for. Ruby’s advisor has warned her about the likelihood of estate taxes, and has suggested life insurance as a means of accomplishing her estate planning goals. Applying the W-CAP approach, she arrives at the following estate planning strategy: 

1. Ruby’s primary concern is being able to create inheritance equalization. Since she has given the business to her one daughter, she wants to provide a comparable inheritance to her other children. Because of her wealth, though, she has another pressing concern—having sufficient liquidity for her estate to pay an expected estate tax. 
2. In order to accomplish her two primary goals, Ruby needs a large life insurance policy. The death proceeds can provide both an inheritance to the two nonbusiness children and a fund to pay the estate tax. Since there’s no way to know when Ruby will die, a large, fixed-death-benefit life insurance policy will provide an uncorrelated asset that is available exactly when needed, irrespective of where the market is at that time. 
3. Ruby has significant wealth, and her need for life insurance is permanent. She chooses to utilize a single life universal life policy. The premium payments will be enough to guarantee a fixed death benefit. 
4. The policy will be applied for, and owned by, an ILIT. At Ruby’s death, the ILIT receives the proceeds, and uses them for two purposes. First, it will pay out inheritances to the two intended children; and second, it will provide liquidity to lend money to, or buy assets from, the estate. This will give the estate the liquidity it needs to pay the estate tax without having the policy proceeds included in the gross estate. 

SCENARIO 2 

Francie and Bob have a projected $3 million estate, and they want to make sure that if they’re not around, their special-needs adult child will be cared for. The couple has completed their financial planning in anticipation of an eventual retirement, and part of their plan has identified estate planning needs. An advisor has suggested life insurance to help with several of their planning needs. Applying the W-CAP approach, the life insurance strategy used for this couple is quite different than for Ruby.

1. Francie and Bob are primarily concerned with providing liquidity for their child, but they want to do it in a manner that qualifies their child for continued government programs and benefits. They are, however, also concerned with the possible adverse effect on their estate plan if one or both of them are confined to a long-term care facility for an extensive period. They do not want their estates exhausted by the expenses of a long-term care incident.
2. This couple’s liquidity need can occur at either death or upon a long-term care event. Further, because the policy will require cash values to accomplish their long-term care need, the insurance product should include features that provide both guarantees and upside potential. Cash value growth is a core consideration in choosing the policy. 
3. Francie and Bob decide to each purchase an individual indexed universal life policy with a long-term care rider. They will use some of their ongoing wages to “overfund” their policies, with the intent that policy premiums will no longer be required after they retire. These policies will provide liquidity in the event of either a death or long-term care event, thereby accomplishing both of their top priorities. 
4. In order to access the long-term care benefits that may be payable, they will own their life insurance policies individually. Since estate taxes are not likely an issue for them, the individual ownership strategy works better than an ILIT to conserve and protect their estates. The primary beneficiary of each policy will be the surviving spouse. If that spouse predeceases the insured, the proceeds will be payable to a special needs trust for the benefit of their child. 

The W-CAP,  Justified 

In both of the above scenarios, the W-CAP helped identify needs, create a solution, and apply a strategy for implementation. There is nothing magical about the W-CAP approach. It is simply a disciplined way to do life insurance planning in an estate planning environment. It puts the need before the solution, and the solution before the ownership strategy. 

An added advantage of a W-CAP is that where an ILIT is actually needed, the process helps justify the concept’s use. Those attorneys who have “TOLI terrors” will more likely buy in to an ILIT structure when they realize it addresses the client’s primary goals. Hence with Ruby from scenario 1, the W-CAP process helped position the legitimate need for an ILIT to own the policy. Conversely, a W-CAP helps avoid the overzealous use of the ILIT structure where estate taxes are not in play. With Francie and Bob in scenario 2, the process helped identify suitable products and then place them in an appropriate ownership position. 

This post was originally published in the Journal of Financial Service Professionals 73, No.2 (2019): 32-36, copyright 2019, Society of Financial Service Professionals. 

Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, is the co-director for the New York Life Center for Retirement Income Planning at The American College of Financial Services. He is also an adjunct professor at both The American College and Drake University Law School.

They’ve put me hand-in-hand, face-to-face, even heart-to-heart with the men and women of this great profession. I’ve met people from all colors and creeds, including those breaking through societal barriers; the veterans continuing their lives of service; the culture carriers of this profession’s long-standing organizations; and the next generation of advisors looking to make an impact in the communities they serve.

I helped cut the ribbon on The American College of Financial Services’ new home, the Cary Maguire Building – a modern, media-driven location that christened a new day in The College’s storied 93-year history. I spoke at events honoring veterans, industry heavyweights, and our 2019 designee and master’s degree recipients. Also, as the first African-American President in The College’s history, it was a profound honor to open our 14th annual Conference of African American Financial Professionals in Atlanta. 

I found its slogan a fitting facsimile to the message I continue to carry with me everywhere I go: lift as you climb. 

There’s a stark choice in this profession: get lost in the darkness of power and prestige or lift up others through a dedication to service. This is the financial services profession, where the ultimate benefit must be theirs, not ours. We must lift up our clients, our communities, and new advisors looking to do the same. Our profession will flourish in the years ahead if we follow the “we, not me” mentality. It’s been tested by crises of confidence that soured trust in our stewardship, by rapidly advancing technology that requires a shift to more holistic service offerings, and by a wave of Baby Boomers who are ready to retire even if their finances aren’t. 

Instead of sitting in a silo, I call on you to uplift our profession with your knowledge and your wisdom. Embrace the kinship of community, and become a financial mentor to your neighbors, colleagues, and career changers. A larger, more knowledgeable advisor community will benefit clients and improve public perceptions. A common fellowship will expand our professional networks and strengthen our ties to the communities we serve. 

Success isn’t about climbing the ladder then kicking it down so no one else can follow. It’s about climbing the ladder, getting to that next level, and looking back at where you started with an extended, helping hand. 

The American College of Financial Services is always looking to do its part. Our goal is to be your life-long learning partner – promoting financial literacy, engaging and educating society, and sharing our knowledge with all who need it. We believe that a rising tide lifts all boats; that an informed society asks the right questions, picks the right advisor, and has better financial outcomes. 

As I make my way through Year 2 at The College, I look forward to seeing many of you at industry events, hearing your stories, and collaborating with a growing, inclusive profession that is moving in the same direction. Together, we are stronger.

The College’s legacy is a virtue. Its 93-year history is one to embrace and leverage, but it certainly cannot impede progress. And that’s the intersection where I live – at the corner of celebrating history and making it. 

As The College’s 10th President and Chief Executive Officer, I wholeheartedly thank the over 170,000 alumni who at times have carried this institution with their time and charity. I revere Dr. Solomon Huebner’s vision, not just as this College’s founder, but as the architect of the modern financial services profession. Yet, I am also conscious of a 21st-century marketplace that looks different, works different, and demands different. 

Different means moving forward with a clear vision guided by strong values. Here are mine.

Urgency is not frantic. Composure and poise are sorely lacking in some organizations. Some leaders think frantic conveys speed and purpose, but instead it causes confusion and chaos. Even if the chaos closes out a short-term project, it breaks the organization’s resolve to continue the long-term mission. Leaders press for urgency without helping their team understand what it means or why it’s important. 

Urgency is also not emergency. The first comes with a greater purpose focused forward to create impactful change and reach tangible goals. The latter is a reactive approach that leads to finger pointing that eventually can sap the life from a business. 

Urgency is the way you prepare and communicate. As a business leader, I try to think as I would communicate – calmly, rationally, and with poise. I’m not perfect, but I believe prepared business leaders can more easily execute their vision. If you are prepared, fewer emergencies arise. If you have a clear vision, urgency comes across as excitement and determination, and that’s reflected in the way you speak across the organization. Aim for the heart, not just the mind. Look for the motivation that will compel a team to take action. Empowered employees don’t feel stressed by urgency; they buy into it. 

Business leaders should also think about communication as more than a town hall or executive retreat. They should convey a sense of urgency in meetings, memos, and emails. They are the spokesperson or organizational role model: lead effectively, and others will follow. 

More than anything, urgency is the execution of a well-thought-out plan. I’m sure you’ve heard the phrase, “Keep Calm and Carry On.” It originated on a motivational poster produced by the British government to raise public morale in preparation for World War II. Today, it’s a popular slogan calling for persistence in the face of challenge or confidence in a plan, no matter the short-term pitfalls. This is relevant to today’s investment environment. The uncertainty surrounding the global impact of a new illness, the coronavirus (or COVID-19), has caused significant market instability, and in turn, fear in many clients, especially those in or close to retirement. See the results of a flash survey we did with advisors who hold The College’s Retirement Income Certified Professional Designation® (RICP®). A global health crisis is an easy reason to cut and run, thereby locking in losses that could otherwise be avoided. 

Now is the time when financial advisors really show their value. How well do you understand emotional investing? Are you following a goal-based approach? Is face-to-face communication your strong suit? Do you have the knowledge to apply theory and data to real-life decisions? 

If your answers to these questions are YES, you are equipped to lead with poised urgency: this is an ability to cut through the noise, re-engage on end goals, and shepherd your clients to safety and success without irresponsibly sounding the alarm. If any of your answers are NO, let this situation serve as a reminder that knowing how to execute crisis communications comes from advanced knowledge and education. 

Stewardship – whether it be of a corporation’s balance sheet or an individual’s retirement account – requires deliberative thought, consistent messaging, and precise implementation. You can’t accomplish those goals in a frenzy, but you can check off the boxes with a sense of urgency that rallies everyone around a common cause. Keep calm and carry on … with the plan.

Do you think I’m exaggerating? While the S&P 500 returned 30.43% in 2019, just 49% of millennials experienced the rise, down sharply from the 61% who rode the soaring market from 2001-2008. We all remember what happened next…a recession that took a psychological toll on young investors during their formative years and shaped an economy that took several years to recover. In turn, these investors didn’t reap the market’s revival due to distrust in the institution. 

This isn’t a “financial services problem.” Enron, Boeing, and Facebook are just a few examples of ethical lapses that have eroded public trust. But to say that these events are bound to human nature or are just inherent in American capitalist society is just wrong. 

At The American College of Financial Services, we continue to take ethics well beyond words. We ingrain our advocacy for ethical standards into our company culture, academic rigor, and alumni initiatives. 

In 2020, The American College Cary M. Maguire Center for Ethics in Financial Services celebrates its 20th anniversary. As the only ethics center within an academic institution focused exclusively on the financial services profession, the Center promotes ethical behavior by offering programs that go beyond the rules of market conduct to help executives and producers be more sensitive to ethical issues and think more critically about solutions. 

In January, I moderated a panel at ACLI’s ERT meeting alongside executives Roger Ferguson, Chief Executive Officer of TIAA, and Roger Crandall, President and Chief Executive Officer of MassMutual. We had a profound, prosperous conversation on the people, processes, and planning that goes into not just building, but maintaining, an ethical business culture. Later that week, we also celebrated the 20th anniversary of the Forum on Ethical Leadership, the vision of Jim Mitchell and his wife Linda. They are synonymous with advancing business ethics through the profession, just as they are so appreciated and deep-rooted in The College’s history. 

It’s been said that ethics represents the attempt to resolve the contact between selfishness and selflessness. In such a fast-paced world, the greatest threat to relationship-based enterprise isn’t technology, but ourselves. Yes, technology is pushing the envelope and narrowing any margin for error, but we as professionals can still win the day by always working in the best interests of those we serve; that the benefit is theirs, not ours. 

We live this commitment every day at The College. It’s in our DNA. Moreover, I believe we have an opportunity, even an obligation, as an accredited, non-profit institution serving the financial services profession to continue to forge forward as a catalyst for shaping this all-important conversation. 

How does that happen? By coming together, and by working with the best and brightest minds in stewardship of the financial services community, in the interests of the clients who are entrusting us with their financial futures. This is a topic I’ll be talking more about over the weeks and months to come.

This webcast was part of AALU/GAMA’s #NavigatingTheNow Webcast Series – conversations with the profession’s top executives and thought leaders in response to today’s COVID-19 crisis. If you have an hour, watch the webcast or read the transcript below. It was an engaging discussion on how The American College of Financial Services is leading through innovation, ethics, and new learning opportunities for today’s financial services professional.

Families caring for special needs children and all the requisite changes that come with them can expect to pay more than twice as much, up to $30,000 per year. It’s a sobering statistic, and while there’s no way to get around those additional expenses or the extra attention caregivers of a special needs child have to deal with and provide, one of the best ways a financial planner can help is to make sure that first and foremost, clients caring for special needs children or an adult with a disability have a life vest to keep them afloat. 

Studies done by The American College of Financial Services indicate 90% of special needs and disability caregivers and family members admit retirement planning isn’t their main priority: caring for their loved one through special needs financial planning is. Of caregivers and those with guardianship who are trying to save, 70% are concerned they’ll have to stop to provide their loved one proper support. This is a noble sacrifice to make, but the truth is clients can’t help their special needs children or loved ones in the long run by jeopardizing their own financial futures. They need to take care of themselves first, so they can then take care of others who need help. 

So what can financial advisors do with their expertise to help clients in these situations? Fortunately, there are some simple, common-sense goals for special needs planning any financial planner can start with. 

Any family, especially those who have guardianship of special needs children or other individuals, should have an emergency savings fund that can cover three to six months of their must-have expenses. Building up a cushion like this won’t happen overnight, especially if family members aren’t high-net-worth earners, so it’s important for the financial advisor to emphasize to them how critical it is to add a small amount of savings into their budget over time. They’ll be grateful for it if an unforeseen problem strikes, like a job layoff or needed household work. In addition, while it’s difficult to estimate future care costs of those with special needs, including Medicaid or eligibility for other government benefits, every little bit helps. Encourage caregiver clients to set aside a little every month into another savings account for retirement planning, or to start building assets their special needs loved ones can access once the caregivers are no longer around. 

In the spirit of planning for the future, those with guardianship of a special needs child or other individual should also look into leveraging any company 401(k) plans they might have to start stashing away money for their retirement and eventual estate planning, or use a traditional or Roth IRA. A solid goal is to set aside five percent of income to start and work up to 10 or even 15% over the next several years. When retirement age finally does come, caregiver clients will be under more financial stress than ever if they’re still caring for a special needs loved one or a person with a disability, and will need all the help they can get. Additionally, end-of-life preparations must be made, and ensuring a special needs child or adult is known legally as the beneficiary of any policies those with guardianship may have is a crucial step to take. 

Finally, a commonly-used saving method among financial advisors for special needs planning and disability-affected families is a 529 ABLE account: clients should consider opening one of these accounts, or perhaps a special needs trust, after they’ve maxed out retirement planning and other savings goals. A 529A can be used, much like a normal 529 college savings plan, to prepare financially for the education of any special needs child or individual with a disability. Since many special needs children or individuals with a disability will also need to attend special schools that cost more than the average education, it’s a valuable part of government benefits caregivers can’t afford to miss out on. 

According to the Center for Disease Control and Disease Prevention (CDC), the numbers have gone from one in 10,000 to one in 54. In addition to the psychological and financial implications of having a child diagnosed with an autism spectrum disorder or any disability, parents of children with special needs are often unaware of the substantial tax benefits available to them and frequently forego many potential tax deductions and credits in determining their tax liability. 

Medical care expenditures alone for a child with special needs can prove astronomical. As a result, parents and their financial services professionals need to become familiar with some unusual Internal Revenue Code provisions in assisting their clients in the planning process. There is a medical expenditure available that often goes ignored by special needs families: medically necessary capital improvements. 

Overview of the Medical Expense Deduction 

According to the IRS, only individuals itemizing their deductions on their federal individual income tax returns can claim a medical expense deduction. Unreimbursed medical expenses are deductible only to the extent they exceed 7.5% of a taxpayer’s adjusted gross income (AGI) through 2020. The 7.5% AGI threshold for the medical expense deduction was reinstated with the Tax Cuts and Jobs Act of 2017 (from prior law’s 10% of AGI) for 2017 and 2018 and was retroactively extended thru 2020 by The Taxpayer Certainty and Disaster Relief Act of 2019. Alternatively, parents who are eligible to participate in tax-advantaged plans through work for funding medical expenses, such as flexible spending accounts or health savings accounts, can set aside limited amounts of money to finance medical care expenses on a pre-tax basis while bypassing the AGI limitation. Flexible spending account pre-tax contributions are limited to $2,750 for 2020. 

The Overlooked Deduction: Capital Expenditures as a Medical Expense 

Under most circumstances, capital expenditures aren’t permitted as a medical expense deduction. As a rule, assets used in a trade or business or held for the production of income are depreciated or amortized over time. Capital expenditures incurred for personal medical expenses are not depreciable nor amortizable. However, a medical expense deduction is available when the capital expenditure is made primarily for the medical care of the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care. 

Qualifying capital expenditures for medical expense deductions fall into two categories. First, expenditures improving the taxpayer’s residence while also providing medical care (e.g., a central air conditioning system for an individual suffering from a chronic respiratory illness). Second, expenditures removing structural barriers in the home of an individual with physical limitations (e.g., construction costs incurred for an entrance ramp, widening doorways and halls, customizing bathing facilities, lowering kitchen cabinets, and adding railings). 

Capital expenditures in the first category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. However, expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier. Further, the entire cost of special equipment acquired to assist an individual with physical limitations is deductible. The following examples illustrate expenditures in both categories: 

Example One 

This past year, Thomas was injured in a severe skiing accident. Thomas sustained a disabling leg injury, which requires him to spend most of his time in a wheelchair. His physician recommends that he install an elevator in his home to alleviate the pressure on his knees from walking up and down stairs. During the year, Thomas made the following expenditures: wheelchair: $3,500, elevator: $19,000, operational and maintenance costs incurred with the elevator: $2,800, and entrance ramp and door modifications: $8,500. According to appraisers, the home increased in value as a result of the elevator by $5,000. As a result, Thomas has a $28,800 medical expense deduction before considering AGI limitations for 2020. 

Example Two

In 2020, Jane, a single mother with AGI of $100,000, fully supported her 20-year-old daughter living with her. Her daughter has no income for the year and was properly claimed as Jane’s dependent. During the year, Jane installed a central air conditioner at a cost of $17,000, which her physician said was required in caring for the daughter’s asthma. After installation, Jane’s home increased in value by $7,000, allowing for a deduction of $10,000 for the central air conditioner. In addition, Jane incurred the following medical expenses in 2020: prescribed drugs: $500, physician expenses: $1,000, and unreimbursed health insurance premiums: $3,000. As a result, Jane has a medical expense deduction of $14,500 before considering AGI limitations for 2020 and $7,000 after subtracting 7.5% of her AGI ($100,000). In addition, if Jane’s utility bills increased $150 monthly after installing the central air conditioner system, her medical expense deduction would increase to $8,800 after the AGI limitation. 

Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility expenses and maintenance costs to operate the elevator as illustrated in both examples) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist. 

Conclusion 

Although many of families caring for those with special needs are aware of the medical expense deduction for special schools and education, the deduction for a capital expenditure for medical care is often overlooked. As illustrated, this deduction alone can result in saving thousands of tax dollars.

You hear the stories of black men and women navigating poverty inside America’s densest projects; the malnutrition, the financial stress, the entrenched inequalities in our system that eventually boil over. They become fearful of the cops, of creditors, even of each other while fighting on the streets for survival. 

Make no mistake – that’s what this is, not what it’s become. I lived this life as a kid in the segregated South – and five decades have not solved these injustices. Fifty years of powerful people thinking they must always fill the sting of silence with their own words, when it’s not their void to fill. 

America now lays bare its weakness in this moment of immense pain. It’s spilled over into the streets of cities and towns across this nation – an anger so deep-rooted leading to glass sitting on sidewalks framing defaced storefronts. I echo Dr. Martin Luther King Jr. in urging those protesting to remember the message they want to deliver. He said, “Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that.” 

Put down the rocks, and pick up the megaphones. Amplify your Instagram audiences. Rally the voices of black churches, and the motivations of black activists. Mobilize a communications effort as wide as these protests can stretch. While America is still largely staying at home, there’s a captive audience bigger than ever before. 

I really hope our nation is ready to listen. But, more importantly, I hope that those marginalized and mistreated for so long are heard and understood. Because this is bigger than a commitment to hiring a few more people of color or setting up a diversity council or cloaking the systemic struggle black people face with a program that means well, but stops a few steps short of feeling uncomfortable. 

I’ve had a tough talk with myself over the last few days. Is The College doing enough? Yes, our scholarship programs lift up people of color looking for valuable, and valued, careers in financial services. Yes, The College’s Conference of African American Financial Professionals will celebrate its 15th year in 2020 as a venue for black men and women to support each other, share stories and strategies, and lift up their communities. 

Yet, we can all do more to create equal opportunity in this world, to establish a fairness doctrine that spurs economic growth from the bottom-up, to re-assess how we’ve lived up to Dr. King’s ideals. We honor his birthday, but how’s that anything close to enough? 

As a nation, we start conversations on race I don’t think we ever intend on finishing. This time must be different. The College will hold itself and its partner companies accountable for affecting real change through real dialogue. A message co-signed by The College, ACLI, NAIFA, AALU/GAMA, and LIMRA was a strong step in setting the tone. 

And, more than anything, we have the opportunity and responsibility to become a platform for progress, where the communities we serve drive the ideas and actions we take. For far too long, pontificators have read some words on race, offered their thoughts and prayers, and America moved on. That cannot continue.