What do I do with the Institutionalized Spouse’s IRA?
Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.
Medicaid planning with IRAs typically involves a considerable amount of caution due to the heavy tax consequences and penalties that can result from careless errors. The same holds true for both preplanning and crisis Medicaid planning. In preplanning, the tax-qualified funds cannot simply be transferred into a trust, and in crisis Medicaid planning the funds cannot simply be co-mingled with other post-tax countable resources in spend-down strategies. So where does that leave IRAs in the Medicaid planning process?
As to crisis Medicaid planning, in some states retirement assets are simply exempt – usually only for the community spouse but occasionally for the institutionalized spouse as well. In other states, these assets must be spent-down before eligibility can be established. For the community spouse this is generally an easy task. He or she can purchase a tax-qualified Medicaid Compliant Annuity. This would convert the IRA from a lump-sum countable resource into a countable income stream only. For the institutionalized spouse, the task is not as easily accomplished.
When an institutionalized spouse has a countable IRA, and wants to qualify for Medicaid benefits, he or she has three options: (1) liquidate it, (2) utilize the “name on the check” rule, or (3) annuitize it.
In many cases a planner who is unfamiliar with tax-qualified Medicaid Compliant Annuity planning liquidates the institutionalized spouse’s existing IRA, subjecting him or her to an early withdrawal penalty and immediate income taxation of the entire liquidated amount. In some cases this is the most appropriate course of action; however, in many cases there are more advantageous strategies that could have been used.
“Name on the Check” Rule
By utilizing this rule the owner/annuitant of the tax-qualified Medicaid Compliant Annuity would be the institutionalized spouse, but the monthly payments would be made payable to the community spouse. If honored as intended, the Medicaid office will apply the monthly payments to whomever’s name is on the monthly instrument – the check. Leaving the tax-qualified Medicaid Compliant Annuity ownership as the institutionalized spouse would avoid negative tax consequences, yet the payment would be considered income of the community spouse. Win-win.
While this sounds like a perfect solution to a problem, unfortunately its success can never be guaranteed. In light of this, it is necessary to determine if it may be best, instead of attempting to utilize the “name on the check” rule, to simply liquidate the IRA and transfer the funds to the community spouse. The tax consequences may not be as bad as initially thought in that the couple may be able to offset the consequences if the institutionalized spouse’s medical expenses exceed 7.5% of gross income.
In the event that a community spouse does not have sufficient monthly income to meet his or her monthly maintenance needs allowance, he or she will receive a portion of income directly from the institutionalized spouse in order to maintain a standard of living. If a very large shifting of income takes place, it may make the most sense to simply annuitize the institutionalized spouse’s IRA with the monthly payments payable to the institutionalized spouse. With the income shifting over to the community spouse, the same result as using the “name on the check” rule will be obtained. Additionally, as to the beneficiary designation, being owned by the institutionalized spouse, the community spouse may be named before the state Medicaid agency.