Advanced Marketing Forum Question

Protecting an IRA for Special Needs

Question:
My client is a 52 year old divorced woman suffering from MS. As a result of her divorce, she was awarded a portion of her ex-husband's retirement assets.

She will soon need to apply for Medicaid, and her elder law attorney has drafted a Special Needs Trust (SNT) to try to protect what limited assets the client has. The attorney advises that such a trust cannot take/hold IRA accounts.

Any thoughts about how to protect the IRA accounts or get the value transferred to the SNT.

Reply #1:
The attorney is correct a trust cannot own the IRA. As beneficiary, Medicaid will view it as her asset. Only two things that I know work are: One, using the IRA as income until the funds are gone and using the disability exception to avoid the 10% penalty. Two, do a lump sum distribution with the one tax hit (still no 10% penalty) and put the money into the special needs trust.

Jay Vesterfelt
Manager Retirement Plans
Ext: 9735
E-mail: jvesterfelt@commonwealth.com

Reply #2:
Consider using a single premium immediate qualified annuity with a period equal to her life expectancy, under 72 (t).

Trygve Stout MBA, LUTCF 56 West Third Street Oswego, NY 13126 Phone: (315) 343-0177 Fax: (315) 343-3455 E-mail trygve@dreamscape.com

Reply #3:
She probably can not do this. Like Connecticut, all states have asset tests (Ct you can only have $1,600. in assets) and income tests. She will probably have to take the IRA and used it as part of her "Spend Down" before she applies for Title XIX. Depending on her asset base, she may need to spend down her assets in order to qualify for Title XIX.

Reply #4:
Isn't the problem with this approach that the client will then have too much income to qualify for Medicaid?

Barry

Reply #5:
The amount of income is going to be subjected to the Minimum Monthly Maintenance Needs Allowance (MMMNA) which varies by state. Medicaid's life expectancy tables are more conservative than the IRS tables. HCFA Transmittal No.64 limits a period certain annuity to life expectancies under Social Security tables. By annuitizing under these guidelines, will she be over the "Income Test"? Getting the assets out of the IRA is going to be a taxable event, and if "gifted" subject to the recapture period.

Jim Fitzpatrick, CFP, CFS, CRS
Advanced Markets
MetLifeInvestors
Phone: (949) 629-1392
Fax: (949) 717-6721
E-mail: jim.fitzpatrick@investmet.com

Reply #6:
IRA accounts are non-transferable (except for a division pursuant to divorce). Therefore, the IRA cannot be transferred to the SNT (however, the SNT could be the beneficiary of the IRA). Your client could always withdraw money from the IRA, pay the taxes, and transfer the net proceeds to the SNT if this strategy makes sense. Your client would probably qualify for the disability exception to the 10% premature withdrawal penalty. However, transfers to the SNT may trigger a period of ineligibility for Medicaid purposes.

State law governs whether (or to what extent) IRAs are protected from creditors. However, the federal Medicaid laws supercede state law, and IRAs are treated as countable assets for Medicaid purposes. There is an exception for annuities (as Trygve was alluding to). An immediate annuity (or a deferred contract that is annuitized irrevocably) would count as income rather than an asset. In a "spend-down" state like Maine, the client would qualify for Medicaid based on assets only. The client would be required to assign all income to the nursing home, and Medicaid would pay any shortfall. Therefore, the use of an annuity as a Medicaid planning option for a single individual is of limited value (especially when there is time to do some Medicaid planning).

Medicaid planning with annuities is more advantageous for a married couple where one spouse is healthy and the other will be entering a nursing home.

Your client should be working with a Medicaid planning attorney who is licensed to practice in your client's state of domicile (presumably Maine).

Rick Petrucci
Counsel, Estate & Business Planning Dept.
Allmerica Financial
S282 440 Lincoln Street
Worcester, MA 01653
Phone: (508) 855-2442
Fax: (508) 852-0654
E-mail: rpetrucci@allmerica.com

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