Posts in category: Estate Planning Drafting Software

The biggest challenge of most Medicaid planning attorneys today is how to plan when the majority of the client’s assets are in qualified funds.  Let’s review the law.  An IRA under the federal Medicaid law is an available resource.  The exception to the general rule is if the IRA is annuitized.  Once annuitized the IRA is no longer considered an available resource, but the income generated from the IRAs monthly pay out is considered income to the applicant in determining eligibility for Medicaid. The confusion occurs in many states exempt an IRA if  required minimum distributions are made, rather than requiring it be annuitized, which protects the IRA.  A recent trend over the past two years, however, is states are beginning to take the position an IRA is an available resource unless annuitized and I expect this trend to continue. So, what are your options? 

There are primarily only two options in this case.  The client can annuitize the IRA, in which he or she converts the entire lump sum into a stream of payments that end at the death of the client.  This rarely serves the long-term goal of the client which is to ensure there is some benefit left for his or her heirs.  The alternative is to liquidate the IRA, pay the taxes and put the balance into an asset protection trust.  The question is knowing when to pull the trigger to liquidate.

For LWP members, they use the IRA liquidation analysis software to calculate the point of no return, when the client would have lost more to the nursing home by distributing the RMD than had they liquidated and paid the taxes to the IRS.  For others it’s more obscure.  But either way the critical issue comes down to the cost offset.  If a client is in the nursing home, then use of the IRA is a great way to get the maximum benefit of the IRA because the cost of the care is tax deductible expense that offsets the taxable distributions from the IRA. This gives the owner the maximum benefit from the IRA and acts as an additional cash benefit to offset long term care costs equal to the amount liquidated multiplied by the IRA owners’ tax rate (usually 20-30%).  Preplanning however, requires a different analysis in identifying the age in which the client begins to liquidate the IRA to ensure that the overall tax rate that they will pay will be far less than what their beneficiaries would pay.  Either way it is a viable solution if you’re doing the proper analysis.  For a demonstration of how LWP calculates its IRA liquidation analysis contact Molly Hall at mhall@lawyerswithpurpose.com.

If you want to learn more about planning with IRAs and more specifically learn more about Clark v. Rameker – the recent court decision that set new precedent that inherited IRAs are not protected from creditors and preditors, join our Free Webinar TOMORROW at 7:00PM EST.  Click here to register now!

During this Webinar you will learn:

• Share the key holdings of the recent Supreme Court decision.
• Discuss the asset protection strategies available for inherited IRAs.
• Identify the four requirements for trusts to qualify to own IRAs without causing taxation.
• Review the "inside" and "outside" planning strategies we have used for years to protect inherited IRAs and provide clients with the maximum number of options at death to avoid the loss of an IRA to creditors and long-term care costs.
• And much much more…

Just register here and reserve your seat… it's 100% FREE!

If you're an existing Lawyers With Purpose member, good news!  You already have access to this information on the members' website.

To your success,

Dave Zumpano

What do they really mean? 

If you're an Lawyers With Purpose member, you know the minimum months to qualify is a term we use in to determine how many months that it will take to get a client’s excess assets down to zero by gifting money and paying for nursing home costs.  It is then used to calculate the breakeven point (60 – minimum months to qualify = breakeven point).

Before a client can be eligible for Medicaid, their excess assets much be zero.  We know that we want to protect as much money as possible and that to do that we have to give the excess assets away (we have already performed our spend down analysis at this point).  If the penalty divisor for the state is $5000 / month, then we know that if we give away $5,000, then we must pay for one month of nursing home cost.  At the point, we have already done the analysis to figure out the monthly deficit – that is, how much money will the client have to pay from their resources after their current living expenses, allowable Medicaid exemptions, and nursing home costs are taken into account.  Let’s say that is $10,000.  So we know that if we give away $5,000, we pay for one month of nursing home cost.  If we have to pay for one month of nursing home cost we have to pay $10,000.  If our excess assets equals $100,000, then to get through month one, we give $5,000 away, we pay $10,000, and that reduces our excess assets by $15,000 and leaves excess assets at $85,000.  The next month, we do it again.  We give away $5,000, we incur one month of penalty, and we pay $10,000 to the nursing home.  That leaves us with $70,000 in countable assets.  The next month we do it again.  We give away $5000, we pay $10,000 to the nursing home, and our countable assets drop to $55,000.  (Longtime members may remember this as the “MPS Dance.”)  This continues until our countable assets drop to zero, then we add up how many times we had to do the dance, and that becomes our minimum months to qualify.  A short cut is to take the total excess assets and divide by the amount needed each month, in this case $15,000.  In our example, that will give us 6.67 months.  In other words, we have to give away $15,000 for 6.67 times in order to get the excess assets down to zero. 

This number is then used to calculate the amount of money we can protect – the penalty divisor times the minimum months to qualify.  Here that would be $5000 x 6.67, which would equal $33,350.  Because we give away $33,350, we know we will have to private pay for 6.67 months (the penalty).  That money is protected because it will not need to be spent on the nursing home.  Then we calculate the amount of money that is at risk until breakeven – that is, if the client or spouse goes into a nursing home prior to the breakeven point, then this is the amount that they will have to pay before Medicaid will begin to pay for their care.  We know that we have to pay for 6.67 months of nursing home care in this scenario, so we multiply the cost of the care each month, $10,000, by the number of months we will need to pay for the care, 6.67, which gives us the total cost that is at risk to having to pay the nursing home as $66,700.  So, worst case, they will have to pay that $66,700 to the nursing home in order to protect the $33,350.  Not great numbers in this particular scenario, but it is still better that spending it all down and applying to Medicaid.

Announcing NEW Pricing, Services, & Membership Changes—Effective Monday, October 27^th

At LWP we are committed to innovation and continuous improvement. In an effort to augment our services and the value of our membership levels, LWP is excited to announce changes to our membership levels. All membership offerings were specifically designed to serve solo, small and medium sized firms based on their customized needs. Changes are applicable to all NEW memberships beginning Monday October 27^th. 

If you have been considering joining the Lawyers with Purpose community, please contact mhall@lawyerswithpurpose.com to schedule a 15 minute demo to see the upcoming pricing, services, & membership structures! 

Existing LWP member? Great NEWS, you’re grandfathered in! 

Dave Zumpano,

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center