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…
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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
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