Question: Since my mother died last year, my father has been failing quickly. He is no longer able to take his medications on time, to dress himself, or to bathe. We have had sitters come in, but this is very expensive. Including Social Security and his pension from the mill where he worked for 40 years, Dad has only $1,100 per month coming in. The vast majority of the family assets were spent on my mother's care. She died in a nursing home after three years of private pay that, with drugs, averaged nearly $4,000 per month. All Dad has left is an IRA of $15,000, stock worth $10,000 which he has had for a long time, and his home which is valued at $45,000. We hired a geriatric care manager to assess him and learned that he should be placed in an assisted living facility, not a nursing home. The cost will be $2,800 monthly plus extras. Because we will have to dispose of his remaining assets and pay taxes in order to afford this, we are curious about whether Dad will be able to deduct his care in assisted living to offset some of the taxes. Also, if he needs to go into a nursing home later, how can we plan for this?

Answer: Last week, we were asked whether a parent who was forgetful and was not eating properly could deduct the cost of assisted living. The answer was that custodial care does not rise to the level of deductibility. Your situation is quite different.

So long as your father is determined to be "chronically ill" by a licensed health care professional within the last 12 months, all or a part of the cost of assisted living may be deductible for income tax purposes and should offset most or all of the taxes incurred when you sell assets.

According to current law, your father would be "chronically ill" if 1) for at least 90 days, he was unable to perform at least two activities of daily living (ADL's) without substantial assistance from another individual due to loss of functional capacity, or 2) he required substantial supervision to protect him from threats to his health and safety due to severe cognitive impairment. "ADL's" are defined as eating, toileting, transferring, bathing, dressing, and continence.

In order to qualify under these rules, the services provided by the facility must fall under the accepted definition of "qualified long-term care services" which are "necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are required by a chronically ill individual, and provided pursuant to a plan of care prescribed by a licensed health care practitioner."

Based on these rules, we believe that if your physician will substantiate the need for care which includes needs to manage medication, safety issues, and assistance with a number of ADL's that the deduction may be appropriate.

How to plan for payment of nursing home care is quite another issue. Since we know that your father's income is $1,100 per month, there will be at least a $1,900 shortfall of cash flow each month. This means that you must go into his assets in order to pay for his care. You can sell the house without concern about capital gains. Assuming the care is tax deductible, you can sell the stocks without payment of capital gains taxes and should be able to dip into his IRA without tax consequence. That said, if you liquidate his holdings, you should be able to put about $65,000 to work for him. You should contact an investment advisor who can help you place the cash into investments that will allow you to withdraw what your father needs each month and return the best interest rate available without long-term commitments or risk. You certainly don't need investments like annuities or mutual funds that will penalize you if you need to make withdrawals.

No matter what you do, your father's money will probably run out in less than four years, and you will then face yet another hurdle. Your question points out precisely why planning should be done at or before the time the first spouse enters the nursing facility. In your father's case, significant assets could have been saved for his care if appropriate planning had been done then.