The Listen to Lawrence Letter: What are the pros and cons of placing an IRA in a trust?

April 28, 2021
My wife and I established a Medicaid Trust with you about 3 1/2 years ago. The only asset in the trust is our house. The only other major assets we own are our IRAs. We have each named the other as Primary Beneficiary and our children, per stirpes, are named as Secondary Beneficiaries.
What are the pros and cons of placing the IRAs in the Trust?
This situation is probably the most common fact pattern I face with clients looking to protect their assets from long-term care costs.  Long Island is a VERY expensive place to live, children are expensive to educate, and at the end of the day, it is only our “forced savings” assets that we have left upon retirement…a house and retirement plans (IRAs, 401Ks, 403Bs and the like).
The direct answer to this question is that there are no pros to putting a retirement plan in a trust. I understand why someone would want to but it would be a disaster to do so.
You see, transferring a retirement plan into an irrevocable trust would cause the entire plan to be taxed this year. So the bad news is that you have to keep all your retirement accounts in your name or cash them in and pay the tax, something very few are willing to or should do. The good news is that, under New York Medicaid, ALL retirement plans are exempt as assets; they do not count toward the $15,900 limit each person is allowed to keep in their name. However, the required minimum distribution (RMD) each year is considered part of your income and Medicaid may be entitled to your income. Also, be aware that Medicaid’s RMD is slightly higher than the IRS’s RMD (they don’t call it an RMD but you get the idea). The bottom line is that if you ever had to go to a nursing home, Medicaid would only get your RMD’s every year but not the principal amount, which will pass free to your family upon your death.
Therefore, our clients who own a home and a retirement plan may want to create an irrevocable trust for their home but will keep their retirement accounts in their name.
I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.
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