Medicaid and Roth IRAs

People often seek help from their estate planners regarding how to protect assets from future long-term care events, such as the need for nursing home care. Irrevocable trusts, also known as Medicaid trusts, have often been used for this purpose. It has historically been challenging to protect Roth IRAs from the Medicaid spenddown process, primarily because Roth IRAs cannot be owned by a trust and do not have a Required Minimum Distribution (RMD) requirement. However, workarounds have recently emerged and appear to be acceptable in certain states, enabling seniors to utilize them to their advantage.

As most seniors are aware, Medicaid is a federal-state program that was established to cover healthcare costs for low-income individuals who require long-term care, such as nursing home care, or have disabilities. Advance Medicaid planning is key to your financial security because of the high cost of these services and the likelihood that these costs will continue to increase.  The regulatory scheme is complicated, with a complex web of eligibility requirements and restrictions, but your Long Island Medicaid lawyer can help you plan for your future.  

A major problem for many seniors is that there is a cap on the amount of assets a person can have in order to be eligible for Medicaid. A way to overcome this cap is by ‘spending down ’; that is, transferring assets to an irrevocable Medicaid trust. You can move large assets, such as your family residence, into the trust so long as you meet certain conditions, and the assets will not count against you for Medicaid eligibility purposes. You can also transfer stocks and other assets. 

The individual who creates the irrevocable trust is referred to as a grantor, trustmaker, or settlor. There is also a trustee who manages the trust and controls its assets. It must be someone other than the grantor. The trustee must adhere to the trust rules, which are very specific regarding how trust funds can be used. A beneficiary is also named, who will benefit from the trust upon the grantor’s passing. For the trust to be Medicaid-exempt, the beneficiary must be someone other than the grantor. If the grantor were also the beneficiary, then he or she would have access to the assets, and Medicaid would consider those assets available to pay for that person’s care and support. 

One of the conditions is that the trust must be irrevocable. This means that once the trust has been created, its terms cannot be cancelled or changed. When assets are transferred into the trust, they no longer belong to the grantor, and the grantor cannot regain ownership of them. If the assets are in a revocable trust—that is, one that can be changed or terminated—Medicaid considers the assets to still be owned by the Medicaid applicant. This is because they still have control over the assets held in the trust. Therefore, the assets are counted towards Medicaid’s asset limit.

Why Roth IRAs Have Been Problematic

Roth IRAs have become increasingly popular, as they allow owners to take advantage of lower tax rates, do not have Required Minimum Distributions, and can be passed on to the next generation. Not only are Roth IRAs inherited tax-free, but the beneficiary can earn investment returns with that inherited Roth IRA for another 10 years before receiving the full account balance tax-free.

Traditional individual retirement accounts have a required minimum distribution (RMD) requirement. Specifically, for traditional IRAs and other pre-tax retirement accounts, individuals born after 1960 are required by the federal Internal Revenue Service to begin RMDs at age 75 and continue them annually thereafter. This is a way for the federal government to obtain some income tax on all the tax-deferred balances in these pre-tax retirement accounts.

But Roth IRAs do not have an RMD requirement, which is viewed as an advantage, except when it comes to a long-term care event and the Medicaid spenddown process.

When an individual experiences a long-term care event, Medicaid tallies up all of that individual’s “countable assets” to determine how much needs to be spent on their care before Medicaid will start picking up the tab. Traditional IRAs are not considered a “countable asset,” but the annual required minimum distributions (RMDs) from traditional IRAs are considered income that must be applied to that individual’s cost of care. 

For example, let’s say Jack has a $250,000 brokerage account and a $750,000 traditional IRA.  He sets up an irrevocable trust to own his brokerage account, makes it past the 5-year Medicaid look-back period, and then has a long-term care event at age 83 that requires him to enter a nursing home. The brokerage account is completely protected, not subject to spending down. However, the traditional IRA has an $800,000 balance, still owned by Jim, and he is receiving a $45,000 per year RMD.  Instead of Jim having to spend down the entire IRA account, he just needs players to commit the $45,000 RMD towards his care, and Medicaid will cover the remaining expenses. Using this strategy, Jim has been able to preserve both his $250,000 brokerage account and his $800,000 Traditional IRA, less the annual required minimum distributions (RMDs), for his children.

Historically, Roth IRAs have been considered a “countable asset” for purposes of the Medicaid spenddown process in New York because there is no RMD requirement to convert that countable asset into an income stream. Recently, however, professionals in the trust and estate arena in a number of states, including New York, have successfully protected Roth IRAs from the Medicaid spenddown process by voluntarily turning on RMD distributions from the Roth IRA account, even though RMDs are not required from Roth IRAs, and Medicaid has accepted this approach. 

So here’s another example using a Roth IRA in a state like New York. Let’s say that Julia has a $250,000 Roth IRA that would normally be subject to the Medicaid spenddown process. Julia has a long-term care event, and her power of attorney contacts the custodian of the Roth IRA and instructs them to begin annual distributions from the Roth IRA based on the IRS RMD table.  The voluntary Roth RMD amount will be counted toward Julia’s income threshold for Medicaid purposes and eventually applied toward the cost of her care. However, now that Julia has converted the Roth IRA to a retirement income stream, Medicaid no longer requires her to fully spend down the Roth IRA balance before submitting her Medicaid application.

Contact Davidow, Davidow, Siegel & Stern, LLP for Immediate Assistance

Here at Davidow, Davidow, Siegel & Stern, we know these Medicaid scenarios are complicated, but we have you covered! Contact us today with all your elder care law, Medicaid law, estate planning, and other similar needs.