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A Better Partnership


Dec 2011
December 20, 2011

Estate Planning Tips: Protecting IRAs

How to Save a Client’s IRA When the Spouse Needs Nursing Home Care
When a client’s spouse is headed to a nursing home, there are limited options to save the client’s IRA. Contrary to popular belief, an IRA does not receive special protection from nursing home expenses and must be cashed out and spent down to within Medicaid asset limits before a spouse can qualify for Medicaid nursing home coverage. The options for preserving the IRA are not pretty and will cause the client some financial pain. But they are better than the alternative of completely exhausting the IRA and leaving the spouse without retirement assets. So what are the options for preserving as much of the IRA as possible? 

Cash Out IRA and Transfer Proceeds to Irrevocable Trust Solely for Benefit of Spouse

If the IRA is above Medicaid asset limits, the IRA can be cashed out and the proceeds transferred to an irrevocable trust for the sole benefit of the non-nursing home spouse. This will require taxes to be paid on the IRA in a lump sum. However, if the client has been private paying nursing home and other health care expenses, this may not be quite as bad as it first seems. The client should have a large amount of deductible medical expenses to help offset the additional taxable income. With the remaining IRA proceeds in the irrevocable trust, the nursing home spouse can immediately qualify for Medicaid. Once in the trust, the IRA proceeds will be unavailable foprotecting r 9 months. After that, they must be distributed to the non-nursing home spouse at a rate based on that spouse’s life expectancy, similar to IRA minimum required distributions. Additional distributions can be made if necessary.  

Annuitize the IRA

Another way to preserve the benefit of the IRA is to purchase an immediate annuity within the IRA that will require equal monthly payments to the non-nursing home spouse over that spouse’s life expectancy. This converts the IRA from a countable asset to an income stream. Caution must be exercised in doing this because the extra income may simply reduce the amount of the nursing home spouse’s income that the non-nursing home spouse is allowed to keep. Whether this method will be better than the first option mentioned above requires an analysis of Medicaid’s income formula and the client’s specific circumstances by an experienced elder law attorney.

Get a Court Order

In some situations, it’s possible to petition the probate court and ask for an order increasing Medicaid’s usual spousal asset allowance. If the court agrees that the client’s circumstances merit special consideration, it may increase the spousal asset allowance to an amount sufficient to shelter the IRA.

Designate a Testamentary Trust as Beneficiary

In some situations, a spouse is able to continue to care for a disabled spouse at home, but the risk is that if the caregiver spouse dies before the disabled spouse, the disabled spouse will have no alternative but to go in a nursing home. In that situation, if the caregiver spouse follows the usual advice of designating his or her spouse as beneficiary, the IRA will be quickly exhausted on nursing home care. An alternative is to designate a testamentary trust under the caregiver spouse’s Will as the beneficiary. If this trust has a 3rd party trustee and permits distributions only on a discretionary basis, the trust assets, including the IRA proceeds, will not be countable to the disabled spouse for purposes of Medicaid qualification. This is only true for a testamentary trust under Will. The exception does not apply to a living trust arrangement.


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