What Happens to a CCRC Entry Fee Refund When a Resident Passes Away?

Continuing care retirement communities (CCRCs or life plan communities) offer a continuum of care, ranging from independent living to skilled nursing care, ensuring that residents’ care needs are met as they age. Many CCRCs require new residents to pay a sizable entry fee when they first move into the community, much of which is often refundable in some manner. The resident’s contract will stipulate the details and requirements of the CCRC entry fee refund if the resident moves out or passes away.

However, many potential CCRC residents and their families are unsure of what exactly happens to those refundable entry fee dollars if a resident dies. When does the money get refunded? Who gets it? Does the refund go through the probate process? And are there any tax implications — such as capital gains taxes — on the refunded amount?

Let’s clarify these important questions so you and your loved ones better understand the CCRC entry fee refund process.

What is a CCRC entry fee?

The entry fee is typically a one-time, upfront payment made by new residents, which provides lifetime access to their home, services, amenities, and a continuum of care. This fee is usually quite substantial — ranging anywhere from tens of thousands to several hundred thousand dollars or higher, depending on factors such as location, the size of the residence, and more.

Residents will also have a monthly service fee (MSF), which gives the resident access to a variety of services, including housing and a specified number of daily meals, as well as amenities, which, depending on the CCRC, might include things like housekeeping and linen service, landscaping and home maintenance, social and educational events, wellness facilities and programs, and more.

Depending on the resident’s contract, the CCRC entry fee is often structured as a declining-balance entry fee refund or a refundable entry fee, such as 50% or 90% refundable. Entry fee refunds at CCRCs are typically paid to the resident if they vacate or to the resident’s heirs in the event of death.

In some cases, rather than paying an entry fee, a new CCRC resident will purchase and own the residence. In other cases, a CCRC may operate as a pure rental model, with no entry fee or home purchase, although the CCRC contract may work a little differently in these situations.

Does a CCRC entry fee refund go through the probate process?

The probate process is the legal procedure by which the assets of a deceased person’s estate are distributed according to their will or state law. When a CCRC resident dies and a full or partial entry fee refund is due, that money may or may not go through probate.

Refund paid to the estate: If the entry fee refund is paid to the resident’s estate, it will likely go through probate as part of the estate’s assets. In essence, the refund will be treated like any other asset that needs to be distributed.
Refund paid to beneficiaries: If the entry fee refund is paid directly to designated beneficiaries (for example, the surviving spouse or children), it may bypass probate if the community’s contract allows for this and if the beneficiaries are named explicitly. In this case, the refund is distributed outside of the formal probate process.

It’s important to check the CCRC contract’s refund terms to determine whether the refund is made directly to beneficiaries or the estate. It is also essential to consult with an experienced estate attorney and/or accountant who understands the unique probate laws within the applicable state.

Are there tax implications with entry fee refunds?

Capital gains taxes arise when an asset increases in value and the owner sells or disposes of the asset for a profit. Questions about capital gains taxes can arise when a CCRC resident’s estate receives a refund on the entry fee, particularly if the resident had lived in the CCRC for a long time and/or if the CCRC residence had appreciated in value.

There are two key things to understand about possible tax implications following a CCRC resident’s passing:

There typically is no capital gains tax on an entry fee refund. Generally, the entry fee refund is not considered a capital gain since it is a refund of an upfront payment that was made for the resident’s future housing and any needed long-term care services. As such, it is not usually taxed as income, nor is it subject to capital gains tax.
There may be depreciation or capital gains considerations based on the sale of the residence (if there is one): In cases where a resident purchases their residence rather than paying an entry fee, any profit made from the sale of that unit could be subject to capital gains tax. The tax implications for real estate sales in CCRCs will vary depending on state laws and whether there is a capital gain or loss on the property itself.

Here again, it is advisable to not only understand the specific terms of the CCRC contract but to also consult an estate attorney and accountant on any potential estate tax/capital gains tax implications.

Understanding CCRC contract terms and entry fee refunds

The decision to move into a CCRC is often about not only the carefree lifestyle such communities can provide but also the peace of mind they offer. For communities that have an entry fee for new residents, that upfront cost can be hefty, but in return, residents (and their loved ones) know that, should care services ever be needed, they will be readily available.

It is essential, however, to know exactly what you are getting for your money. This is why understanding the fine print of your CCRC contract is important, including whether all, some, or none of your entry fee is refundable should you move out of the community or pass away.

It is also helpful for your loved ones (particularly the executor of your estate) to be clear on the contract’s specifications around entry fee refunds. And, as with any significant financial arrangement, contract, or real estate deal, it is wise to consult with experienced legal and/or financial advisors too. These experts can clarify any questions you or your loved ones might have about the CCRC entry fee refund policy and possible estate tax implications.

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