Can you place an IRA inside a trust as a means of shielding it from spend down requirements for Medicaid reimbursement?
A prospective client states that they have a "trust" (not sure yet what type of trust) where they have been previously advised they could place retirement money that is currently in an IRA inside the trust and still have it remain inside the IRA and grow tax deferred. Since I am not a lawyer I am not sure of the legality of such an arrangement.
Answers (12)
Thomas H
Owner, Thomas E Healy CPA PC
Best Answers in: Tax Law (3), Regulation and Compliance (1), Accounting (1), Corporate Debt (1), Corporate Taxes (1), Economics (1), Personal Taxes (1), Personal Debt Management (1), Retirement and Estate Planning (1), Incorporation (1), Starting Up (1)
An IRA owner has to be an individual, unless that person dies, in which case an estate can own the IRA for a relatively short period of time, either until it is liquidated or distributed to heirs.
John C
Director of Business Development at Constant Profit Advisors
Best Answers in: Accounting (2), Auditing (1), Corporate Taxes (1), Property Law (1), Tax Law (1), Manufacturing (1)
Sorry, I have to agree with Thomas. Worse, I would imagine that such a transfer would potentially cause a taxable distribution since the money is not legally the client's money to transfer until they take it as a taxable distriubtion.
I hope for their sake they are just confused (which happens more often than not as you are well aware).
I'm not an attorney, but I believe that technically an IRA is a trust. It's for the benefit of the account holder, on a tax deferred basis of course. Moving the funds into anything else should trigger a distribution because the new account registration would not be a qualified registration.
In my experience, clients may say this when they have named a trust as the beneficiary of their IRA. This can be determined by asking the clients to ask the IRA custodian for a copy of the beneficiary designations.
Bryan A
VP & Trust Officer at Midwest Trust Company
Best Answers in: Personal Investing (2), Wealth Management (2)
Bill, I am not familiar with any kind of trust where an IRA can be "owned" by the trust while the IRA owner is still alive (obviously that's a contradiction in terms). There are certain trusts currently permitted for Medicaid qualification purposes in which the owner transfers assets into a trust subject to the requirement that Medicaid can make a claim against those assets at death to repay the amount Medicaid paid in benefits to the deceased applicant (with anything remaining going to the family). Of course, that would NOT be a tax deferred arrangement however, since you would have to distribute the funds out of the IRA to get them into assets owned by such a trust (which is a taxable event).
There are certain types of non-qualified annuities in which a person can transfer assets and potentially achieve Medicaid qualification in some states. This may be what your prospective client is talking about.
Essentially, the IRA owner would have to do a total distribution of the funds into the annuity and the annuity provisions are such that the IRA owner has divested the asset, allow it to grow tax free (as a non-qualified annuity product) to pass on to future beneficiaries at death.
Obviously, this is perilous territory, as far as I am concerned. First, you have the taxability of the initial distribution out to the non-qualified annuity. Second, the funds are essentially "locked away" and cannot be used for any "non-Medicaid" needs that the client might have. Finally, the annuity idea only works in certain states, as I understand it, depending on the specific Medicaid eligibility requirements in that state.
I would counsel your prospective client talk to an elder law expert in Medicaid planning before proceeding with any kind of "divestiture" plan to achieve Medicaid qualification. A good place to start looking for an attorney in your area is the National Association of Elder Law Attorneys (NAELA). Their Website is below.
Links:
Jeff M
CERTIFIED FINANCIAL PLANNER® Practioner & Insurance Broker
Best Answers in: Individual Insurance (7), Personal Investing (3), Health Care (1), Currency Markets (1), Personal Taxes (1), Personal Debt Management (1), Personal Real Estate (1)
No. A trust cannot own an IRA. You could remove it from the IRA and place it in trust, but the IRA can't go in.
Clarification added 2 months ago:
The trust can be a beneficiary of course, but then you lose the ability to move it out of the IRA over the beneficiary's life expectancy...
Clarification added 1 month ago:
You MAY be able to open an immediate annuity as an IRA (not just any one though, and I'm not sure if the rules have changed because in the past only specific companies could do it). The immediate annuity would then be treated as income and not an asset, but if the person passes away after two years and you set up a 5-yr payout you'd still have income/assets coming back in. I set one up for a client a bunch of years ago and it worked as advertised, but like I said I'm not sure if those rules have changed so consult an appropriate attorney.
Robert F
Assoc VP - Financial Advisor at Morgan Stanley
Best Answers in: Personal Investing (2), Retirement and Estate Planning (1), Personal Real Estate (1), Wealth Management (1)
William,
You don't mention in your post where the prospective client holds this IRA/Trust. I do know, however, that Merrill Lynch offers something called the "Trusteed IRA". It's an IRA, managed by the Merrill Lynch Trust Company. It's still an IRA, but it has many features that you would normally associate with a trust, particulary regarding legacy control.
The nomenclature of the program is a bit misleading as it is NOT an IRA in a trust--but many clients don't recognize the difference. If your prospective client utilizes ML-BAC, this may be to what they refer.
Robert
John M
Legal Counsel at TapRoot Systems, Inc.
Best Answers in: Intellectual Property (17), Corporate Law (8), International Law (6), Tax Law (6), Property Law (5), Criminal Law (4), Employment and Labor Law (3), Starting Up (3), Personnel Policies (2), Advertising (2), Small Business (2), Staffing and Recruiting (1), Internationalization and Localization (1), Contracts (1), Business Development (1), Graphic Design (1), Quality Management and Standards (1), Professional Books and Resources (1), Blogging (1), Using LinkedIn (1)
William,
Irrespective of any of the "IRA in a Trust" considerations already discussed by most of the responders, do NOT forget the "look-back periods" that apply when dealing with Medicaid.
There are two forms of the "look-back period." The first pertains to transfers of assets within 60 months (5 years) of applying for Medicaid. This rule creates a waiting period before the applicant is eligible for benefits. The waiting period is determined by the value of the assets transferred divided by the average monthly cost of Medicaid benefits for the applicable state. For example, you transferr $36,000 and the average cost to provide nursing home care in your state is $3,000. You are not eligible for Medicaid benefits for 12 months.
The second "look-back period" involves transfers to irrevocable trusts or gifts made in the 60 months (5 years) prior to applying for Medicaid. This provision allows the government to recapture any assets you either placed in trust or gave away within 5 years of going on Medicaid.
The rules can get complicated so i would advise that you have your client consult with a competent estate planning and elder law attorney before transferring assets to trusts.
Good luck and I hope this is helpful,
John
Disclaimer: This is not legal advice and we do not have an attorney-client relationship.
It is my understanding that the code does not allow for the IRA to be in a trust during the lifetime of the individual. A trust can be a benificiary of the account upon death but in most instances that would be the last altnerative since it would trigger immediate recognition of the deferred income. By transfering the balance of the IRA to the spouse or children in a separate inherited IRA account the recipent can recognize the income over the life expectancy of the inheritor of the account
Agreed that an IRA cannot be owned by a trust.
There are a couple of things to think about. If this is a case of long term illness, like alzheimer's, and you are planning for several years down the road, it may be worth it to withdraw the money from the IRA and do whatever you want/can with it right away.
The second choice to to own exempt assets in the trust. Certain kind of annuities can be structured as exempt, for instance.
In either case you will want to talk with a qualified medicare planner who should know the law and the taxes of potential transactions.
Good luck,
Jake
Barry P
Certified Public Accountant/Personal Financial Specialist and Certified Financial Planner
Check out your state rules, or check with an elder law attorney. You definitely cannot put the IRA into a trust. HOWEVER, the IRA may not be a countable asset for Medicaid purposes, although minimum distributions may count as income available for Medicaid.
I've seen too many cases where individuals divested themselves of an asset without proper guidance, and created a tremendous income tax burden for themselves or their heirs, that was worse than paying for a nursing home.
1. In general, an IRA is already a specific trust, and they may have misunderstood their attorney's discussion. As to planning for Medicaid and this specific attorney, I would decline to discuss any specific arrangement they have.
2. Hopefully this attorney is reputable. Your client (and/or yourself with their consent) could contact the State Bar Association to see if this attorney is, in fact licensed and if there are any prior complaints, as a bit of personal comfort.
3. If they are asking you to place their IRA in such a trust, be certain you have your own legal folks look at the request.
