How SECURE Act Changed Estate and Long Term Care Planning – Part 3
In the past 2 weeks’ posts I have been talking about the SECURE Act and how it has changed the tax laws with respect to retirement accounts such as IRAs and 401ks. With limited exceptions (as noted in my post last week), beneficiaries who inherit these accounts upon the owner’s death can no longer stretch the payments out over their life expectancy.
From a tax planning perspective, the advice to withdraw only the minimum required in order to preserve tax deferred status and pass that on to children and grandchildren, becomes less relevant with the restriction of stretch provisions. When we look at long term care planning, however, the goal to keep as much as possible in these tax deferred accounts, is still a problem when we are faced with clients who have substantial long term care expenses that can be $150,000 a year or more.
If these clients have no long term care insurance then they must pay privately until their assets are below the level needed in order to qualify for one of the government benefit programs that cover long term care, usually Medicaid or in the case of wartime veterans, the VA Aid and Attendance program. In order to protect some of the assets for a healthy spouse or other family members, for example, we can transfer assets to a trust provided we do it a sufficient amount of time before the need for care arises.
Transferring retirement accounts however, will result in income tax consequences because in order to protect those accounts, we cannot preserve them as IRAs or 401ks. Not knowing what the future holds, we can protect the retirement account by withdrawing those funds and moving them to another account but triggering the loss of 1/3 of the value or more to income taxes. Alternatively, the client can choose to leave the account alone but if he/she lives long enough, could be forced to use the entire value of the account towards long term care, thus protecting nothing.
While the SECURE Act does not change the analysis, it can change the outcome. That’s because the advantage of doing nothing to avoid the income tax consequence has become a bit less attractive since the tax deferred strategy is now so much more restrictive. At the same time the likelihood of needing long term care and the cost of that care only continues to increase.
As I have said often for many years, the looming possibility of long term care changes long held beliefs about tax planning and passing on wealth for many families. The SECURE Act has now made that even more apparent.