How the SECURE Act Changed Estate and Long Term Care Planning – Part 2
In last week’s post I reviewed the stretch provision of the tax laws that apply to retirement accounts such as IRAs and 401ks. These laws allowed tax deferred accounts to remain tax deferred for a longer period of time by allowing certain beneficiaries to “stretch out” the time within which they must withdraw funds and pay tax on the growth in these accounts. As I stated last week, as long as a beneficiary was a designated beneficiary (ie.an individual) the stretch provisions could be utilized. The SECURE Act which became law on January 1, 2020 changed all that. Stretch provisions were severely limited to a small group of individual beneficiaries. For all other formerly designated beneficiaries, a 10 year rule now applies. The 10 year rule says that for most designated beneficiaries distributions from an inherited retirement account must be made no later than the end of the calendar year which is 10 years after the death of the account owner. Failure to empty the account by that deadline carries a pretty stiff penalty - 50% of the amount that was supposed to be distributed but wasn’t. There is no minimum withdrawal requirement each year. You must simply “zero” out the account by the 10 year deadline. The SECURE Act
How SECURE Act Changed Estate and Long Term Care Planning – Part 1
At the end of 2019 Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act which made some significant changes to retirement accounts - some positive and some negative. I wrote about it a bit when the law was passed (See posts 1/5/20 and 1/13/20). In the year plus since the law became effective as of 1/1/20, many people are aware of the positive change. The age at which an account owner must begin to take withdrawals (required beginning date or RBD) was extended from age 70 and 1/2 to age 72. Fewer know about the new limitations in using the “stretch” provisions that permitted children, grandchildren and other beneficiaries to extend the tax deferred benefits of inherited retirement accounts inherited by withdrawing the funds over their life expectancies. Before the law changed, if I inherited my parent’s retirement account I could roll it into an inherited IRA and stretch out the distributions. I could make those distributions over my life expectancy but needed to begin taking the first withdrawal within a year of my parent’s death. Being younger than my parent, of course, my life expectancy is longer so by utilizing the stretch provisions I could keep more of the balance in the tax
Another Word about QITs – Part 3
The past 2 weeks my blog posts have covered QITs. Last week I told you about a case in which the trustee initially transferred the correct amount to the QIT, the Medicaid recipient’s entire monthly Social Security, however, when that amount increased because of the cost of living adjustment, the trustee did not make the adjustment to transfer the higher amount into the QIT bank account. The caseworker approved the case but warned that if the mistake was not corrected it would result in a denial of Medicaid benefits when it came up for renewal in a year. In another case in another county, the caseworker decided not to let the mistake go. The trustee put the correct amount into the QIT for the first couple of months but then subtracted $50 from the Social Security amount received before transferring the rest into the QIT account. As I explained last week, all income must go to the nursing home with limited exceptions. So why did the trustee subtract $50? That’s because under Medicaid rules recipients can keep enough of their income to cover any health insurance premiums such as a Medicare supplement, commonly referred to as a Medigap policy. The recipient is also entitled to keep $50 each
Another Word About QITs – Part 2
In my post last week I revisited a Medicaid topic that I am frequently asked about - qualified income trusts. An applicant’s income that exceeds Medicaid’s strict monthly income cap ($2382 in 2021) must deposit some of that income into a QIT before then sending it where it must go according to Medicaid rules. That’s the very general overview, however, the State of New Jersey has imposed very specific rules that must be followed or else - meaning a mistake can cost you Medicaid eligibility. Enough income must pass through the QIT so that the income that is left totals under the income cap, however, the income can’t be split. All of a source of income must be deposited into the QIT. For example, if you receive $1000 from a pension and $1500 from Social Security you can’t simply deposit $250 from the pension or the Social Security into the QIT to drop the amount down to $2250 which falls under the income cap. You must deposit the entire pension income or the entire Social Security amount received into the QIT. When I set up the QIT and review it with the proposed trustee, I give very detailed instructions on how the trust is to be used. We try
Another Word about QITs
I last wrote about qualified income trusts (QITs)last September but I want to revisit the topic because of 2 recent applications in our office in which the trustee failed to follow the very specific requirements that the State of New Jersey has imposed. It has often happened that people call our office inquiring about how to set up a QIT and it turns out that they are a year or more away from actually being able to qualify for Medicaid. They call because they have heard or read that a QIT is necessary. It’s obviously something that comes up very quickly when searching for information about Medicaid on the internet. The QIT is a critical piece to achieving and maintaining Medicaid eligibility, however, it also one of the aspects to Medicaid that is very easy to mess up ,simply because the State has made the mechanics of the trust and managing it so technical. Before we get to that let’s review the basics. Medicaid has a strict income cap ($2382 in 2021). If an applicant’s income exceeds that number, Medicaid eligibility can only be achieved if a QIT is used to pass thru some of the income before sending it to either the facility providing care or
Divorce and Medicaid – Part 3
In last week’s second part of my post, I laid out some basic strategies for couples who, while still legally married and living together, view themselves as separated or divorced. Unfortunately in the eyes of Medicaid you aren’t divorced unless you’ve got the Judgment of Divorce to prove it. When I tell a healthy “community spouse” that his/her assets are countable for Medicaid purposes I hear the disappointment and sometimes the anger, however, in many cases this doesn’t necessarily mean a bad outcome. That’s because of the way the asset and income rules work for a married couples. There often are opportunities to protect what the community spouse considers to be his or her assets alone and sometimes we can protect much more than that. Last week I pointed out that paying off a home mortgage or buying a new home will protect the assets. I recognize, however, that selling and then buying a new home is not practical and may be overwhelming to an already stressed community spouse. A Medicaid compliant annuity is another option. As I stated last week the community spouse’s income is not counted for purposes of eligibility. This gives us an opportunity to convert assets to income. As I have written about in previous blog