Planning Before the First Spouse Dies (Part 2)
Last week I was telling you about Mary’s call. Her mom is in a nursing home paying $11,000 per month and her sister, Terry is in a group home. Mary doesn’t want to spend down all of Mom’s assets towards her care. She wants to be able to save some for her sister’s needs, as well as an inheritance for herself, as her parents had intended. Setting up a trust now for Terry is an option but only for Terry. While a transfer to that trust is exempt from Medicaid’s penalty provisions, none of the funds placed in the trust can be used for Mary’s benefit and Terry doesn’t have so many needs. Probably $150,000 in trust for her would be more than sufficient but whatever isn’t transferred to the trust will have to be spent down. There is Mary’s dilemma. She could put more than that in Terry’s trust but it will sit there, probably never needed. Had her parents put a better plan in place before Dad died, however, they could have accomplished the desired result. What they should have done is change their wills so that upon the first spouse’s death, his/her assets pass to an
Planning Before the First Spouse Dies
Mary called because her mom was in a nursing home paying $11,000 per month. Her sister, Terry, disabled and living with Mom for many years, had her own health problems and was now living in a group home. I asked about her mom’s finances. Mary told me she owned a home worth $450,000 and had another $175,000 in liquid assets. Mary’s question to me was “Can we save any of Mom’s assets and qualify for Medicaid?” Mary was concerned about how to care for Terry. She pointed out that “Mom’s will leaves everything to me so that I can use some of those funds for Terry’s care”. I explained that unfortunately this doesn’t help now. If Mom passes away, Mary will inherit what is left of Mom’s estate and she can use those funds to help care for Terry without concern that Terry will have to spend down those assets before qualifying for Medicaid or fear of losing Medicaid if she already is receiving it. That’s because the assets will never pass to Terry. The problem, however, is that Mom currently owns them and can’t qualify for Medicaid to cover her own care until she either spends down the
The Problem with IRAs – The Solution
So, what is the solution to Bill’s IRA problem from last week? He has $1.2 million in IRA money and doesn’t want to risk losing it all to long term care if he gets sick. But protecting it by moving it to a trust will cause him to pay a lot in income taxes. What if it turns out that he never needs long term care? Is there something that allows him to protect the asset without incurring the tax? The answer is a specific type of insurance product, an individual retirement annuity and 20 pay whole life insurance policy with an accelerated death benefit for qualifying long term care expenses. This means that if Bill needs long term care, he can draw against the benefit on a monthly basis to cover care at home, in an assisted living facility or in a nursing home. How exactly will this protect his IRA? By repositioning a part of his IRA to this product, which he will use to pay long term care, he can protect the rest of it without withdrawing it which would require him to then pay taxes. He doesn’t pay any tax on the part
The Problem with IRAs – Part 2)
Last week I was explaining the problem with IRAs and long term care. If you need care at $125,000 per year or more but want to protect your IRA, what are your options? It’s always easiest to illustrate by way of an example. Bill has an IRA worth $1.2 million and he doesn’t have long term care insurance. Bill has two ways to pay for his care. Use his own money or apply for Medicaid benefits. However, Bill must have no more than $2000 in assets to his name if he wants to qualify for Medicaid (a bit more if he is married). So, Bill must first spend the $1.2 million before Medicaid will begin paying. “What about if Bill transfers his money out of his name”, you may ask? That’s what we call 5 year trust planning. Move the assets into a trust, leave enough to cover 5 years and then Bill can qualify for Medicaid. While statistically the odds are that Bill will need the care, we can’t say for sure. What if he passes away peacefully in his sleep and never needs care? Pulling $1.2 million out of his IRA will cost him somewhere in the
The Problem with IRAs
IRAs, or any retirement accounts really, have always been a problem when it comes to long term care. They are a great vehicle for accumulating wealth. You can put away savings in an account which will earn interest on a tax deferred basis. No income tax is paid on the growth until you start taking money out. In some cases you can put pretax dollars from your earnings into the account, meaning you don’t have to pay income taxes on that portion (again until you take the money out). As most people know, the government requires you to start drawing money out of the retirement account after you have turned age 70 and ½, according to required minimum distribution rules. Since Congress authorized these accounts in the 1970’s the financial investment community has recognized the opportunity they have created and has spent a lot of time and expense encouraging Americans to open and fund them. The benefits are well documented but not the downside. “What might those be,” you ask? While the government excuses income tax on the growth in these accounts, it doesn’t excuse the tax forever. As I stated, you must start withdrawing money after you reach age
How to Self Insure for Long Term Care (Part 2)
Last week I was telling you about using your own money, what we call legacy assets, to self-insure for long term care. This week I’ll walk you through an example of how that can work. Mary is 73 years old. She has high blood pressure, for which she takes medication but otherwise is in relatively good health for her age. She does not have long term care insurance, having considered and then passed it up 10 years ago. Now she feels it is too expensive, if she can even find a company to offer it. She also hears her friends complain about the rate increases they receive annually. If she must keep the policy in place for 10 or 20 years before ever needing care what would she end up paying in premiums? For Mary, self-insuring using a life insurance policy with riders for long term care makes a lot of sense. Mary has $400,000 in CDs and money market accounts. She owns her home worth $450,000 and she has IRAs totaling another $600,000. Mary’s income from Social Security and a small pension comes to $3000 per month. By repositioning $200,000 to this life insurance policy, Mary will receive