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IRA's and Pensions Complicate Medicaid Planning

Question: My husband and I are both retired, and each of us has a modest employee pension plan and an IRA. He is the beneficiary of mine and I am the beneficiary of his. We have met with a financial planner who helped us decide how much money we would have to draw each month to supplement our Social Security. Other than our home and a small savings, we have no other assets. Although we are both in relatively good health now, we have become concerned about what will happen to these funds if one of us goes into a nursing home. Because we need all of both our funds to pay expenses, if one of us goes into a nursing home, can the one who remains at home transfer the other's pension and IRA without disqualification from Medicaid?

Answer: When it comes to planning for long-term care and Medicaid eligibility, the rules will depend on whether you live in a "209(b) state" (Connecticut, Hawaii, Illinois, Indiana, Minnesota, Missouri, Nebraska, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, Utah, and Virginia) or an "SSI state" (the remaining 36 states and the District of Columbia).

Since the answer to your very complicated planning question will depend on where both you live and the type pensions you have, you will require the assistance of an experienced elder law attorney and tax professional in your community.

For a nursing home spouse to qualify for Medicaid, his or her countable assets can not exceed $2,000 and the countable assets of the community spouse are limited to an amount established in each state.

That said, the general rule in SSI states is that to the extent that the pension funds are not available to the nursing home spouse, those assets will not be deemed to be countable for Medicaid purposes. Since an individual can cash in an IRA, Keogh plan, simplified employee pension (SEPs, 401(k), and employee stock ownership plan (ESOP), these types of pensions are countable resources. However, funds held in employer-sponsored qualified pension plans -- which are independently administered -- may not be counted to the extent that the funds are unavailable.

On the other hand, when the pension fund or IRA is in the name of the spouse who remains in the community, these plans are generally not counted as resources of the nursing home spouse when determining his or her eligibility.

In "209(b) states", federal standards are applied in determining the resource allowance for the community spouse in determining Medicaid eligibility.

However, the countable assets can be converted to an income stream if the nursing home spouse has made an irrevocable election to receive monthly distributions from a pension fund. In this event, if the community spouse is the beneficiary, after the nursing home spouse dies, the income stream will not be subject to estate recovery. However, converting the asset to an income stream raises a whole other specter of income limitation issues which must be dealt with.

An IRA is a countable asset when determining Medicaid eligibility because -- unless annuitized and turned into an income stream -- most IRAs can be withdrawn by the applicant at any time. A community spouse's IRA will not count some states, but has counted in others. Where counted as a resource, the community spouse should consider converting the IRA into an annuity, thereby changing the nature of the account from a resource into an income stream.

IRA's and pensions can not be transferred from spouse to spouse. While a spousal beneficiary can roll a deceased spouse's IRA into her own IRA, if an IRA is removed from the name of one spouse and placed in the name of the other, there will be a constructive distribution to the beneficiary of the entire balance in the account - meaning immediate taxation and possibly penalties.

Taking the NextStep: This column is an oversimplified overview of a complicated and evolving area of long-term care planning. Be sure to contact appropriate legal professionals before you make any move that could be irreversible and devastating.

See www.nextsteps.net



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