An individual retirement account (IRA), 401k, or similar retirement account is a wonderful way to save for retirement, provide for a surviving spouse, and even to leave a legacy to the next generation.

But if a retiree has uninsured long term care needs, that valuable account could be at risk.

Here are some thoughts on protecting such an account.

At the crisis point

Let’s start with a situation in which someone –let’s call him Joe – needs skilled nursing care right now. What are the options?

If Joe is married, his wife’s qualified retirement account is exempt from spend-down in qualifying for Medicaid. Joe and his wife may qualify for benefits depending on what assets they have and how much they spend on care, but if his wife had an IRA worth, say, $200,000, it wouldn’t count in the equation.

What if Joe has an IRA worth $200,000? It is countable, so what can Joe do?

First, he may be able to make an exempt transfer to someone else. For example, if Joe has a disabled child or other family member, he may consider giving the contents of his IRA (after taxes) to his disabled child or establishing a special needs trust for a disabled family member who is under age 65 (a grandchild, for instance). While asset transfers to others made less than five years before a Medicaid application usually lead to ineligibility for benefits, exempt transfers don’t count.

Second, Joe might cash in his IRA and use it to purchase items that are exempt. He could buy irrevocable burial reserves for himself and his wife. If his wife were renting an apartment, he could even buy her a house to live in. Joe could therefore qualify for benefits sooner while benefitting his wife.

Joe could also consider using his IRA to purchase an annuity. This alternative raises complex legal questions under the Medicaid rules. But if done right, an annuity for Joe’s spouse could give her greater income while avoiding unnecessary spend-down of assets.

If Joe were unmarried, he could still consider annuitizing his IRA. This option requires a careful analysis of Joe’s age, life expectancy, care costs, income, and other factors. There is some legal authority providing that an annuity purchased “by or on behalf of an annuitant who has applied for [Medicaid]” with proceeds of an IRA is not considered an “asset” for purposes of penalized asset transfers. In the right situation, Joe’s heirs could benefit more from the annuity option than from a straight spend-down.

Planning ahead

As with many elder law issues, better results come from planning ahead.

If you’re not at the crisis point, see your financial advisor or insurance professional about long term care insurance. It’s a great way to protect your retirement assets and have better care options.

Protection of retirement assets can also be part of a comprehensive estate and asset protection plan. We discuss this topic in depth at our regular estate planning workshops.


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