In most states an IRA, or a tax-qualified fund, is a countable asset for the spouse who is or is going to be institutionalized. Thus, the IRA will have to be spent down for his or her care.
In many cases the planner who is unfamiliar with Medicaid Compliant Annuity planning liquidates any existing tax-qualified accounts, subjecting the client to an early withdrawal penalty and immediate income taxation of the entire liquidated amount.
Rather than subjecting the client to this outcome, the preferred planning method would be to make the IRA, or tax-qualified fund, an exempt resource. This can be accomplished by converting the resource into an income stream by way of a Tax-Qualified Medicaid Compliant Annuity. This is done by initiating an IRA Transfer (direct plan administrator to plan administrator transfer) from the current custodian to the Medicaid Compliant Annuity company. It is important to know that this transfer does not trigger a taxable event. Also, by maintaining the tax-qualified status, the annuitant/owner is neither subject to an early withdrawal penalty nor immediate income taxation of the full account value.
In those cases involving a community spouse, there are ways to protect the institutionalized spouse's IRA for the community spouse. In such a case, the IRA could first be converted into a Tax-Qualified Medicaid Compliant Annuity by way of an IRA Transfer. Then, in order to protect the IRA income fro the benefit of the community spouse, the "Name on the Check Rule" is utilized.
The "Name on the Check Rule" is the common guidelines for determining to whom income belongs. The easiest way to determine ownership of income is to see whose name is on the check. If a check is made out to a particular person, that person is considered the owner of the income. Similarly, benefits paid to a specific individual in the form of income are considered to be that person's income, whether paid by check or via some other method such as electronic funds transfer. Under federal statute, no income belonging to the community spouse is considered available to the institutionalized spouse when determining that spouse's eligibility, and there is no federal limit on the amount of income a community spouse can have - some exceptions apply (e.g. several states have placed income caps on the amount of income a community spouse is allowed to receive without interfering with the institutionalized spouse's eligibility).
To date, most states recognize the "Name on the Check Rule;" however, there are several states that this is not considered a viable planning option. Additionally, many states do not require that the State Medicaid Agency be designated as a remainderman of a Tax-Qualified Medicaid Compliant Annuity; however, again, there are several states that do require such a designation regardless of the tax-qualified status. Krause Financial Services always recommends that an applicant seeks the counsel of an experienced elder law attorney, licensed in the applicable state.
