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September 20, 2022

Practical Information for Lawyers: IRAs: The Problem Asset Related to Medicaid

Dale Krause, JD, LLM

The PDF in which this article appears can be found in Bifocal, VOL 44, Issue 1

Long-term care is an unavoidable reality for most people. According to the Centers for Medicare & Medicaid Services (CMS), 70% of seniors will require long-term care at some point in their lifetime. With many seniors being financially unprepared for an event like this, some may find themselves in crisis.

This is part of the reason the emerging field of elder law has become so popular—seniors need guidance from attorneys who specialize in the complex legal issues related to aging, including long-term care. When an individual experiences the financial burden of long-term care without having done any planning in advance, an elder law attorney can step in and provide relief.

This relief typically comes in the form of accelerating Medicaid eligibility while preserving assets in the process. When it comes to long-term care, the Medicaid program pays for all or most of the individual’s nursing home costs. The catch? The individual first must pass a rigorous screening process hinging on both financial and non-financial criteria. This is why an elder law attorney is needed. Most people do not qualify on their own and do not want to lose their life savings to the nursing home.

To qualify for Medicaid, an individual must be at least 65 years of age, blind, or disabled. They must also be a U.S. citizen or qualified alien. Additionally, they must reside in a Medicaid-approved facility. While the non-financial criteria are relatively straightforward, things become more complicated when considering the financial criteria.

The rules surrounding financial eligibility are generally split into two categories: income and assets. In most states, the person seeking Medicaid—referred to as the institutionalized individual—must have income below their cost of care. If that person is married, their spouse—known as the community spouse—does not have any income limitations.

When it comes to assets, there are both exempt and countable assets to consider. Exempt assets do not impact Medicaid eligibility; however, countable assets will count toward the institutionalized individual’s resource allowance. In most states, the resource allowance for a single person is only $2,000. If there is a community spouse, that spouse may retain a separate and distinct resource allowance (up to $137,400 in most states in 2022).

Exempt assets typically include items like the individual’s home, one vehicle, personal property, small-value life insurance policies, and funeral expense trusts. Countable assets include just about everything else. However, there is one type of asset that is particularly problematic—retirement accounts. Retirement accounts may include traditional IRAs, 401(k)s, Roth IRAs, and more. For purposes of this article, we will apply the term “IRA” to all applicable retirement accounts.

The classification of an IRA as either exempt or countable for Medicaid purposes varies by state, though most states consider this asset to be countable. With many individuals holding the majority of their wealth within an IRA, these accounts often create a hurdle for elder law attorneys to overcome. Most seniors cannot retain their IRA and still qualify for Medicaid. But, if they liquidate an IRA, they become subject to a plethora of tax consequences.

The solution for most clients may lie in a simple annuity product. A Medicaid Compliant Annuity (MCA) is a single premium immediate annuity, meaning it is funded with a lump sum premium and the contract immediately begins returning income to the owner. These contracts hold no accessible cash value and meet some additional restrictions compared to other annuities as required by the Deficit Reduction Act of 2005.

It is these restrictions that make the annuity “Medicaid compliant.” The most notable restriction is the requirement to designate the state Medicaid agency as a beneficiary of the contract upon the owner’s passing, usually in the primary position. However, the savings experienced from accelerating Medicaid eligibility typically outweigh any reclaim by the state Medicaid agency as beneficiary, and there may be exceptions to this rule depending on additional factors.

The MCA aids in the process of accelerating Medicaid eligibility by converting once countable assets into an income stream with no cash value. This means the assets are eliminated in the eyes of the state Medicaid agency and the individual may be considered financially eligible to receive Medicaid benefits. It is a tried-and-true product that has many strategies and use cases associated with it.

A large benefit of the MCA is its ability to be funded with tax-qualified money. This means owners of an IRA can roll over or transfer their account to an MCA should they need to seek Medicaid eligibility. In most cases, this process involves a community spouse funding an MCA with their IRA and using the income from the annuity to help maintain their lifestyle in the community while their partner receives benefits in a facility.

When executed properly, the transfer of the funds is not a taxable event. Instead, the funds are taxed as payments are released from the annuity. Since annuities of this nature are typically structured to provide income over several years, this means the individual has the opportunity to spread the tax liability over several years as well, all while gaining the benefits of financial relief from the nursing home.

While we always recommend consulting with a tax expert before making changes to an IRA, it is important for elder law attorneys to keep this strategy in mind. Since most individuals incorrectly believe they will never need long-term care, many fail to take the proper steps ahead of time to protect themselves and their assets should they eventually require a nursing home stay. This is where crisis planning strategies—like using a Medicaid Compliant Annuity to preserve an IRA while qualifying for Medicaid benefits—become invaluable tools for attorneys working with senior clients.

    Dale Krause, J.D., LL.M.

    President and CEO of Krause Financial Services

    Dale Krause, J.D., LL.M. is the President and CEO of Krause Financial Services—a firm that specializes in asset preservation solutions, education, and resources for long-term care, including Medicaid Compliant Annuities, Long-Term Care Insurance, and more.

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