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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 neighborhood of $500,000 in income taxes.  This type of planning is best done while Bill is still healthy and doesn’t yet need long term care.  But, I don’t have a crystal ball to know what the future holds.  If it turns out that he never needs care, then we guessed wrong.

Ok, maybe he should wait until he needs care and then pull the money out of the IRA.  While that would lessen the tax somewhat because the cost of his care could be a deduction taken against the tax, he would need to leave enough to cover 5 years of his care before applying for Medicaid.  He certainly would need to pay more for his care in those 5 years than if he moved the money while he was still healthy and didn’t have those long term care costs.

And what if he doesn’t live through the 5 years, and never makes it to the point of qualifying for Medicaid.  Then we again guessed wrong.  He will have paid the tax and never gotten the benefits.

So, you see how IRAs have really presented us with a dilemma.  The type of planning we have done for years, while beneficial to many of our clients, isn’t at all helpful to someone like Bill.  We’ve never had a solution for the “Bills” who call our office – until now.

Next week, I’ll share with you how that has changed and what Bill can now do to protect his IRA.