Retirement & Medicaid Planning

Because three sets of rules apply to them and to nothing else in the estate. They pass by the custodian's beneficiary form, so the will is irrelevant and a stale form controls; a 401(k) passes to the spouse under federal law unless the spouse has consented in writing to another beneficiary. Every dollar withdrawn is ordinary income to whoever receives it, and since 2020 most non-spouse heirs must withdraw everything within ten years, with annual minimums inside that period when the owner had already begun distributions. And a trust can be named only if it qualifies as a see-through trust and reaches the custodian by October 31 of the year after death. A plan that handles the house and the brokerage account perfectly can still send the largest asset to the wrong person at the highest tax rate, so we review the forms on file at every meeting.

Medicaid is the only public program that pays for custodial nursing-home care, and it is means-tested, so planning means arranging what you own so that you qualify when the time comes without having spent everything first. The state reviews every transfer in the 60 months before the application and imposes a penalty period for gifts made inside it, calculated by dividing the gift by the average monthly cost of a nursing home, and the period does not start until you are in care and otherwise eligible. A spouse at home keeps the house, a vehicle and a resource allowance set each year, plus a share of the applicant's income if the spouse's own income is low. Planning done five years out uses an irrevocable trust; planning done at the nursing-home door uses the spousal rules and compliant annuities, and saves less.

An irrevocable one can; a revocable trust is counted as if you still owned everything in it, because you do. The Medicaid asset protection trust pays its income to you and never its principal, and after 60 months the principal is no longer a countable resource. The home usually goes in first, with a retained right to live there, so that it is protected from estate recovery after death while still passing to the children with a stepped-up basis, which a limited power of appointment preserves. Retirement accounts are the hard case, since moving them into a trust means withdrawing them and paying the income tax, so the plan often leaves them out and protects everything else. Whether the trust fits depends on your age, your health and how much income you need to keep.

Through the documents that act while you are alive. A power of attorney for property that does not expressly authorize gifts, including gifts to the agent, leaves your agent unable to make the transfers a Medicaid plan may require once you cannot sign, so we draft that authority in or deliberately leave it out. The revocable trust should send the retirement accounts to the right people through properly completed beneficiary forms rather than through the trust itself, unless a see-through trust is intended. And the will, the trust and the beneficiary forms are checked against one another so that a child disinherited in one is not made the IRA beneficiary in another. A change to any one of them is a reason to reread the rest.

Five years before you need it, which in practice means at retirement, since nobody knows the date. The 60-month look-back means an irrevocable trust protects its contents only after five full years have passed, and a gift made inside the window creates a penalty that begins only after you are in care and otherwise eligible. Long-term-care insurance bought in your fifties or early sixties is the other early option, and an Illinois Partnership policy lets you keep assets equal to the benefits it has paid if you later apply for Medicaid. The planning that remains at the nursing-home door, spousal allowances and compliant annuities among it, still works but preserves less. The one thing that costs nothing to do early is a power of attorney with gifting authority, and it is the one most families discover they lack.

At every step. Inherited retirement accounts are taxed as ordinary income to the heir, and the ten-year rule compresses that income into a decade, often pushing a working child into a higher bracket; a Roth conversion in the owner's low-income years, or a charity named for part of the account, changes the result. After age 70 and a half, up to the indexed annual limit can go directly from an IRA to charity as a qualified charitable distribution, which counts toward the required minimum and never enters income. A Medicaid trust is drafted as a grantor trust so its income is taxed to you at your rates and the house keeps its basis step-up. Where a distribution, a conversion or a trust's treatment is questioned, we represent clients in matters before the IRS. The result depends on the facts, and we do not promise one.