Ohio Department of Medicaid Changes Treatment of Retirement Plans- Eases Burden of Planning

The Ohio Department of Medicaid (ODM) has finally adopted a change that means retirement accounts will no longer be counted  as resources for determining Medicaid eligibility. This means that Ohio law now comports with existing federal law,"[a]fter six suspenseful years," as one law firm characterized the change,  Understanding the change, and its impact, requires some appreciation of  Medicaid and its role in paying for long-term care.

As most know, Medicare provides no real long-term care benefit. Medicare does not cover the cost of any care in a nursing home when a person requires only custodial care. Custodial care includes the following services:

• bathing
• dressing
• eating
• going to the bathroom

Generally, if the care or services that a person requires can be provided by another person without a degree or certification, Medicare does not cover the service.  There is no licensing required for one person to assist another to bathe, or to dress themselves.  There is, of course, licensing required for dispensing medical care, or providing certain rehabilitative care services such as physical therapy and occupational therapy.  

Further, non-custodial care is not fully covered by Medicare.  The best Medicare will do is pay for acute or rehabilitative care for a short period of time following a three-day hospitalization.  The Medicare benefit provides payment for twenty (20) days of institutional care following hospitalization, and additional payments for necessary care up to a total of one hundred (100) days.  After that one hundred (100) days, if a person needs long-term care (in-home assistance, assisted living, or a nursing home), that care is not paid for by private health insurance or by Medicare. 

Nursing home care can cost, on average, $8-12,000/month. Most people cannot afford to pay out of pocket such a large amount for long, so many turn to Medicaid to cover these costs.

Medicaid will pay for the cost of a nursing home or assisted living facility, provided that the institution accepts Medicaid reimbursement, but Medicaid benefits are limited to the impoverished.  That means that:

• A single person can have no more than $2000 to their name (in addition to a home and a car);
• A married couple is limited to a maximum of $139,000 and often less if the combined estate is less that $278,000 (the Community Spousal Resource Allowance or CSRA is one-half of the estate up to $139,000 but only one-half whatever the estate is valued at if the estate is less than $278,000).

To qualify, Medicaid applicants must "spend down," a euphemism for impoverishing themselves, especially since the person receiving their benefits may have to contribute their income to their cost of care.

Taxes and Retirement Accounts Under The Old Rules

For many people, retirement accounts (IRAs, 401ks, 403bs, deferred compensations, Roths, etc.), have replaced the home as the most valuable asset in their estate. Retirement accounts are owned by human beings (for example, trusts or LLCs cannot own retirement plans), and cannot be transferred between people except by death or divorce. Except for Roth IRAs, the taxes haven’t been paid on the accounts, so if individuals want to cash it out, they’ll incur significant income tax. 

Safeguarding the home or after-tax investments from spend-down ahead of time under the Medicaid rules is and has been fairly straightforward. Simply, to protect the retirement accounts, the account would be liquidated and the tax  incurred and paid.  In addition to the tax consequence, liquidation often meant losing the future benefits of tax deferred growth.  The options for safeguarding retirement accounts were limited, complex, expensive, and, for most people and advisors, frustrating. 

Many people would simply leave their retirement assets exposed to spend-down risk, choosing to forego the tax incurred and necessary, and protect their home and other assets.  Imagine a senior paying the cost and expense necessary to protect their $200,000 home, only to lose their $500,000 IRA left exposed. Those who chose against protecting the IRA in advance would, in crisis situations, end up with a severe tax consequences liquidating their IRA to either pay for care, or to protect other assets.

Under the old rules, if a couple had $500,000 in retirement assets, that amount counted toward their asset limit. They would have to spend their money until they reached $139,000 in total countable assets, incurring taxes along the way.  Retirement accounts were not treated any differently than checking or brokerage accounts for eligibility purposes.

Taxes and Retirement Accounts Under The New Rules

Starting in 2016, Ohio changed how it takes Medicaid funding from the federal government. As part of that change, it had to align Medicaid with Social Security disability asset rules. Under Social Security rules, retirement accounts are not counted as assets if they pay out regular, periodic payments – those payments are counted as income instead. In other words, as long as you take your required minimum distribution, or set up a recurring distribution that looks like a required minimum distribution, then Medicaid wasn't supposed to consider how much is in that account, just how much those distributions are.

After four years, the Ohio Department of Medicaid finally started talking about making the change. Some counties adopted these rules consistently, others inconsistently, and some not all. Finally, after more than a year of promising guidance, ODM published Medicaid Eligibility Policy Letter 164 on May 26, 2022. This letter clarified how the Social Security rules applied to Ohio and confirmed that retirement account payouts should be treated as income, and the principal should not be counted.

The change means seniors won't be forced to cash out their retirement accounts in order to qualify for Medicaid. It will save taxes and allow more money for the applicant or the healthy spouse. 

Some folks believe, and are being led to believe that the new rules completely protect retirement accounts.  That is not true.  The income is still countable, but estate planning can provide a solution in the form of a Qualified Income if the income is excessive.  Even then, and more fundamentally Medicaid estate recovery still exists.  Medicaid estate recovery permits Ohio to recover money paid in benefits from a Medicaid recipient’s estate.  

Regardless, the change will make planning much comfortable for people with large retirement accounts. 

Liberal Magazine Fires Shot Across the Bow of Cruise Ship Roth IRA

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator.  Roth IRA's are popular investment choices for Americans.

Roth IRAs are similar to traditional IRAs, the biggest distinction between the two being how they are taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. Once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

Many people use Roths because account holders don't have to start taking distributions at age 70½ as they do with traditional IRAs. The money can sit untouched and grow tax-free throughout the owner's lifetime—a big plus for those who don't need the assets to live on. And while those who inherit any type of IRA must start taking distributions immediately, they are permitted to stretch out those payments, allowing the bulk of a Roth account to continue growing tax-free.

This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers. They are, at the same time, increasingly unpopular among those who champion government intervention to alleviate wealth disparity.  I have warned investors to consider seriously possible future changes to the laws governing Roth IRA's before investing, and particularly before implementing IRA conversions, i.e., liquidating a traditional IRA, and paying the taxes on the investment, in order to convert the investment to a Roth IRA that permits future tax-free withdrawals of both principal and income. See, "Roth IRAs Dim as Inheritance Vehicles- Beware the Rush to Covert."

Mother Jones Magazine (MJ) recently published an article critical of the government continuing to "support" wealthy individuals in an effort to avoid taxation using Roth IRA's. The article may be the first in a coming onslaught of attacks against the investment option, and may be a bell weather indicating reform. 

Although the article often reads more like a partisan platform or political screed (the article is openly published under the MJ "Politics" section), language choice, narrative, and hyperbole aside, the article explores the uses and misuses of the Roth IRA, particularly as a tool of the ultra-wealthy: 

"For many working Americans, a Roth IRA is a useful, if not particularly interesting, way to save money for retirement. For tech billionaire Peter Thiel, it was a way to accumulate more than $5 billion. The nonprofit journalism shop ProPublica ran an exposé in June revealing how a small number of extremely wealthy folks had ended up with Roths—federally subsidized retirement accounts meant for middle-class savers—worth tens to hundreds of millions of dollars and up. Thiel did so, the article noted, by “stuffing” his Roth IRA with wildly undervalued “founders shares” of pre-IPO startups—potentially an illegal tactic—and then watching as their values rose exponentially, and completely tax-free.

The story prompted congressional leaders to request data from the nonpartisan Joint Committee on Taxation, which reported that, as of 2019, more than 28,000 Americans held combined (Roth and traditional) IRA balances of $5 million or more, and 497 taxpayers had balances of at least $25 million. The latter group had socked away a combined $77 billion in their IRAs—on average, more than $150 million each. 'IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,' Sen. Ron Wyden (D-Ore.) lamented in a press release.  

But it turns out IRAs are only the tip of the iceberg. The bigger problem, according to Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center, is that, thanks to a series of bipartisan bills Congress has passed over the past quarter-century, the government spends a fortune subsidizing a whole range of retirement plans whose benefits flow overwhelmingly to America’s most affluent. 'It’s unbelievable the amounts of dollars at stake, and how tilted they are to the high end,' Rosenthal told me. 'It’s just staggering.'"

The author acknowledges that reform of the Roth IRA is not likely or particularly popular, right now:

“'The wealth defense industry—the lawyers, accountants, and wealth managers to the super-rich—are paid millions to sequester trillions, stretching the limits of the law and sometimes writing the law themselves,' says Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and author, most recently, of a book titled The Wealth Hoarders. 'They have fracked every corner of the tax code, especially tax-advantaged retirement programs, to extract benefits for their wealthy clients.'"

The article concludes with a contributing source explaining possible reforms and illustrating the lack of receptiveness there is for reform in Congress: 

"'To prevent stuffing and other kinds of self-dealing, [Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center] continues, Congress should just forbid people from holding non–publicly traded assets—like shares of a pre-IPO startup—in an IRA. Lawmakers also could enact a combined asset limit that covers all types of tax-advantaged retirement plans—as first proposed by the Obama administration. They also could strengthen nondiscrimination rules or consider shoring up Social Security—which appears to be in trouble—instead of further enriching the families who need the least help in their old age. “Congress will struggle to solve the problem they created,' Rosenthal told me in an email. 'But the longer they wait, the harder it will be.'

He’s not holding his breath. In July, when the Senate Finance Committee held a hearing titled 'Building on Bipartisan Retirement Legislation: How Can Congress Help?,' Rosenthal and University of Chicago professor Daniel Hemel submitted a statement for the record, but most of the professionals present at the hearing were part of what he calls the retirement-industrial complex: 'The benefits community, the practitioners, the retirement service industry—they testified. Nobody was invited to testify who says the emperor has no clothes.'"

MJ, despite is controversies, and mis-fires, has often been at or near the forefront of a once controversial position moving mainstream.  MJ was, for example, among the first to overtly connect Former President Trump to the alt-Right, although it's effort was roundly criticized, from the Left because its article portrayed a neo-nazi in a "positive" light.   

More importantly, the past few years have demonstrated just how quickly change is possible.  Roth IRA's, like all investment options, should be considered carefully. 

Trusts as Beneficiaries of IRAs Post Secure Act- The Song Remains the Same?

A common question this year is, "should I name my trust the beneficiary (or contingent beneficiary) of an IRA after passage of the Secure Act?" The Secure Act limits the ability to "stretch" the IRA over the life expectancies of beneficiaries.

The Secure Act, perhaps, reduces the incentive of creating an accumulation trust whereby the beneficiaries are required to keep and maintain the IRA in trust for weal building, taking, normally, only Required Minimum Distributions) RMD's.  An accumulation trust maximizes the power of tax deferral over the longest possible period of time.  

The Secure Act, however, does not change, fundamentally, the analysis whether a trust can or should be a beneficiary of a Trust.  Of course, there are exceptions, but our office regularly recommends naming a trust a beneficiary of IRA.  The remainder of this article will explore the costs and benefits of each strategy. 

An IRA is an investment account that you own in your individual name. In fact, during your life, only you (or a spouse) can own the IRA without it becoming taxable.  It is, therefore, almost never advisable to transfer your IRA to your trust while you are living (the rare exceptions being certain types of planning where incurring the tax is acceptable under the plan, such as Medicaid planning or tax conversion planning). 

Each year, you can contribute income that you earn, to an IRA subject to certain limits. For traditional IRAs, this contribution typically is deductible from your income, and then later withdrawals are subject to income tax. For Roth IRAs, the contribution generally is not tax deductible, and later withdrawals are tax-free. If you withdraw assets from either type of IRA before age 59 ½, you generally will incur an early-withdrawal penalty of 10%.

When you reach age 72, you must start taking required minimum distributions (RMDs) each year from a traditional IRA. The RMDs are based on your age and a life expectancy factor listed in tables published by the IRS. Roth IRAs are not subject to RMDs during your life.

If you withdraw only the RMDs from your IRA, there will normally be assets left in the IRA at your death. And, if the IRA has a high rate of investment return, it is possible your IRA will be more valuable at your death than it was when you started taking RMDs.

The IRA proceeds, normally, do not pass under the terms of your will or trust, but instead pass by way of the IRA beneficiary designation. The most common designations are to individuals – for example, all to a spouse or in equal shares to children. A trust, however,  can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual or group of individuals.

When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust. Some good reasons to consider naming a trust as an IRA beneficiary, instead of an individual, include:

• Avoiding Probate.  Beneficiary designations, like all forms of Direct Transfer Designations work best when there is a tidy timing, order, and sequence to demise.  If, however, a beneficiary survives, but does not prosecute a claim form (perhaps due to illness, incapacity, or incompetency), the proceeds will be subject to probate in the estate of  the deceased beneficiary even if there is a contingent beneficiary. If a primary and contingent beneficiary both pass nefore the death of an account owner,  and there is no other beneficiary, beneficiary, the proceeds will ordinarily pass as part of the account owner's probate estate.  Each institution, however, will have its own rules, since beneficiary designations are governed by contract.  This can create uncertainty regarding matters such as how long must the beneficiary survive the owner in order to be considered a beneficiary.  Trusts remove these uncertainty, and do not involve probate since assets are distributed at the action of a Trustee, when the Trustee completes the administration, rather than being determined on an arbitrary dates such as when the account owner passes.  

• Beneficiary Ownership Limitations. Perhaps the intended beneficiary is a minor who is legally unable to own the IRA. Or, perhaps the IRA owner wants to support an individual with special needs who will lose access to government benefits if he or she owns assets in his or her own name. A solution in both cases could be to name a trust as the IRA beneficiary, which will then become the legal owner in place of the minor or individual with special needs.  More importantly, a trust can "spring" protection into place when needed.  In other words, the beneficiary is protected even if s/he was healthy and not receiving government benefits when the account owner created the plan, but later unexpectedly suffered some change in circumstance creating disability, challenge or disadvantage to distribution. 

• Second Marriage or Complicated Family Structures. An IRA owner may wish for RMDs to benefit his second spouse during the spouse’s lifetime, and then have the remainder of the IRA pass to his own children. If the IRA owner leaves the IRA outright to his spouse, he can be certain that his spouse will benefit, but he can’t guarantee that his children will receive anything. If he instead leaves the IRA to a properly structured trust, his desire to benefit both sets of beneficiaries can be carried out.

• Competent Management. We often hope IRA beneficiaries will take only the RMDs, but an individual who has inherited an IRA has the right to take larger distributions, or even withdraw the entire balance of the IRA. A beneficiary's access to an inherited IRA owned by a trust will be subject to the terms of the trust.

• Succession Control. When an individual IRA beneficiary inherits an IRA, s/he can name their own successor beneficiaries. If the IRA owner wishes to control succession beyond the initial beneficiary, the owner will need to set forth the succession terms in a trust and name the trust as the IRA beneficiary.  Do you want your grandchildren, for example, to inherit the proceeds instead of your daughter or son-in-law? 

• Creditor Protection. A person’s own IRA has some level of protection from creditors.  Inherited IRAs do not enjoy the same protection; the U.S. Supreme Court ruled  that inherited IRAs do not qualify under the Federal Bankruptcy Code as exempt from the claims of creditors as “retirement funds.” An inherited IRA held instead in a properly structured trust will not be an asset of the beneficiary and will have full or partial protection from creditors.

• Contingency Planning.  What if....?  What if a beneficiary becomes disabled, becomes incompetent, marries unwisely, becomes an addict, becomes a criminal, joins a cult, develops severe marital problems, finds bad luck and has numerous creditors, becomes a citizen of another nation that treats property differently, develops severe mental illness, becomes incarcerated or institutionalized?  Trusts can be flexible forward looking instruments that permit planning you might think unlikely or even impossible.  Beneficiary designations are only a name on a line, regardless of what happens after the name is written.   

• Avoiding Estate Taxes.  Most estate plans for wealthy individuals include trusts designed to minimize and postpone the payment of federal and state estate tax. For such estate plans to work as intended, the portion of these trusts that shelters an individual’s federal or state estate tax exemption amounts needs to be funded upon the individual’s death. Often, the only asset available to do this funding is an IRA.

• Minimizing Income/Capital Gains Taxes. Many estate plans  include trusts designed to minimize and/or postpone the payment of federal and state income or capital gains tax. For such estate plans to work as intended, the portion of these trusts that produces deferral or maximizes step-up in basis need to be controlled by the trust.  Beneficiary designations can, especially combined with other instruments, accomplish these, perhaps, but alone they are powerless to accomplish such objectives.   

Regardless, there is little doubt that the luster of stretching an IRA to minimize income taxes is limited by the Secure Act. The rules about distributing an inherited IRA after the owner dies have changed. The preferred payout has long been the “stretch IRA,” where the post-death RMDs are stretched out, with annual distributions, over the life expectancy of the new IRA beneficiary. In this case, the IRA could continue to grow tax-deferred, often for many decades after the owner’s death.

The SECURE Act, passed in December of 2019, has significantly reduced the ability to create a stretch IRA. The prior stretch rule has been replaced, for most beneficiaries, with a 10-year rule that requires the IRA to be distributed out completely by the end of the tenth year following the year of the IRA owner’s death. It was originally believed that the 10-year rule does not require annual distributions, so long as the full amount is distributed by end of the tenth year. Unfortunately, new rules seem to require RMD's, defying the predictions of many pundits.   

The new 10-year rule does not apply to the following beneficiaries (known as “eligible designated beneficiaries”): the IRA owner’s surviving spouse, the owner’s children while they are minors, certain individuals who are chronically ill or disabled, and any person who is not more than 10 years younger than the IRA owner. The stretch IRA is still available for these beneficiaries.

The post-death RMDs for a trust named as an IRA beneficiary will be calculated under either the stretch payout rule, the 10-year rule, or the 5-year rule, depending on certain attributes of the trust and the trust beneficiaries. It matters whether the trust qualifies as a see-through trust, whether it is a conduit trust or an accumulation trust, and whether the trust beneficiaries are non-individuals, “regular” beneficiaries, or part of the new class of “eligible designated beneficiaries.” 

The analysis of which RMD rule applies is not always clear, and there are aspects of the SECURE Act that will require clarification through IRS regulations. For these reasons, among others, it is important to involve your estate planning attorney and accountant in any decision to name a trust as an IRA beneficiary. You will want to confirm that your reasons for naming a trust as your IRA beneficiary are reflected in the trust terms and will not be negated by the RMD payout rules. It is also important to review beneficiary designations to be sure that any trust beneficiaries are appropriately named.

It is important to note that the RMD payout rules are different than the payout rules of the trust. Even if an IRA must pay out under the 5-year rule to a trust named as the IRA beneficiary, it does not necessarily mean that the IRA assets will distribute out to the trust beneficiaries within five years. Instead, the terms of the trust regarding distribution to trust beneficiaries will apply. For example, if the trust is completely discretionary, then once the IRA assets are distributed out of the IRA to the trust itself, the after-tax proceeds of the IRA will remain invested with other assets of the trust until the trustee exercises its discretion to make a distribution to one or more of the beneficiaries.

Inherited IRA Beneficiaries May Be Required To Take RMD’s

The SECURE Act became law on January 1, 2020 and made several changes to the rules for retirement accounts. One provision is that non-spouse beneficiaries of IRAs, with a few exceptions, must deplete the account within 10 years of the original owner’s death. This applies to all deaths after January 1, 2020. With this requirement, the SECURE Act put an end to the IRA Trust, which allowed IRA beneficiaries to stretch the Required Minimum Distributions (RMDs) over beneficiary’s  entire lifetime. Stretching was limited to a child and/or a grandchild or a qualifying trust benefitting a child and or a grandchild.

Many legal experts who analyzed the SECURE Act assumed the new 10-year rule would work like the existing 5-year rule for IRAs whose owners died prior to 72 and that had no designated beneficiary: although all funds had to be depleted within that time frame, no annual RMDs were required. The publication of IRS 590-B on March 21, 2021  (see pages 11-12), suggests the assumption was wrong and that the Internal Revenue Service requires RMDs.

590-B appears to suggest that not only would non-spouse beneficiaries of IRAs have to empty the entire account within ten years, but they also might  be required to take annual required minimum distributions in years 1-9. Those withdrawals would be based on the beneficiary’s own age and life expectancy. 

The tax implications are significant. Beneficiaries of traditional IRAs would have to pay taxes on their withdrawals, based on their tax bracket. Beneficiaries of Roth IRAs would lose the opportunity for the entire amount to grow tax-free before withdrawing it all at the end of the ten-year period.  This, of course, is the federal government's intention; the SECURE Act removes the tax benefits of stretch IRAs and ensures the government a meaningful opportunity to collect taxes as soon as possible.

The IRS rule has not been finalized, and is now open for public comment. Non-spouse IRA beneficiaries should be aware that depending on what happens, they may have to take a withdrawal this year. 

RMD's for 2020 were waived, by the way, due to COVID-19.

Importance of Senior Tax Deduction Returns in 2021

A tax break for seniors that all but disappeared last year has resurface this year. This tax break benefits retirees in their 70s and up. These tax breaks are qualified charitable distributions (QCD), "which allow individual retirement account holders to divert some of their federally taxable required distributions to charity." The deductions allow IRA holders to make donations and reduce their federally taxable income. 

The pandemic limited the effectiveness of this deduction last year.  The Cares Act effectively cancelled required minimum distributions (RMDs).  Even though you could still use QCDs, their effectiveness was almost completely eliminated due to the cancellation of RMD requirements in 2020:  those who didn't want the taxable income could simply forego the RMD, and thus, there was no need to take take advantage of the QCD.

Now, retirees can take advantage of these contributions. However, if considering QCDs, you should consult with your financial or tax  advisor to discuss the best way to take advantage of these contributions, or possibly to stay away from them.  There are limitations and possible pitfalls. 

For more information, go here.

Source: Allan Sloan, "A tax break for retirees is back. Here’s how to use it — and what to avoid," Washington Post, March 18, 2021. 

Secure Act- As the Dust Settles

The SECURE Act was passed in late December, so the first few weeks of the year brought significant discussion about what it means, what it accomplishes, and how it effects estate and financial plans.  Fleming and Curti, PLC, in Tuscon, Arizona assembled the "most interesting articles, blog posts, and musings" regarding the Secure Act.  Among them was, of course, Attorney Robert B. Fleming's highlights,  but noted that many others were "giving similar overviews."  

Here are just a few:

• National Law Review;
• K&L Gates, global law firm;
• Kiplinger;
• Kitces’s blog, "(with a nifty summary chart)," and;
• Investment News magazine..

Natalie Choate, the universally recognized guru of estate planning and retirement plans provides a "deep dive" in the form of a 35-page analysis.

Fleming and Curti noted: 

"[a]s the days passed, more reading ensued. Nuances of the Act, some good and some not so good, were dissected and discussed. Because this is still new, expect this to continue in the months (and probably years) ahead." 

Among the interesting reads on specific Act-related topics:

• How law affects special needs trusts, including fixing the “kiddie tax” treatment for minor beneficiaries.
• One possibly unintended consequence: the Act limits the amount of Qualified Charitable Distributions (“QCDs”) the holder of a traditional IRA can make.
• Tucson attorney Brent Nelson explained that, if you really dissect the options, naming a trust as an IRA beneficiary became even more complicated.

In addition, to deal with the much-discussed loss of the “stretch” for inherited IRAs, different strategies are emerging:

• Consider the likely tax situation of the potential beneficiaries and adjust designated beneficiaries accordingly.
• If you have charitable intent, consider a charitable remainder trust.
• Think about converting to a Roth: Is it right for you?; how a conversion works with an IRA trust; and some traps to avoid.

Of course, there is a lot more out there. If you are interested in ongoing analysis, there’s The Slott Report, with almost daily posts on IRA news. Don’t believe everything you read, though. Especially right after a new law arrives, be mindful that 1) it takes a while for the dust to settle, 2) regulations, certain to come along, should clarify some things, and 3) every person’s situation is different. Plan to talk with your financial advisor and estate planning attorney.

This blog will post a separate article in a few days outlining how our office is revising trusts, and IRA beneficiary strategies as a result of the Secure Act.  The most obvious impact, of course, is the loss of the "stretch" IRA for the generation of an IRA owner's grandchildren.  IRA trusts still have utility, but the financial benefits are obviously less compelling.   There is not, however, an utter loss of the tax deferral for children or spouses, however, despite misinformation to the contrary.  The ten-year pay-out rule is not always the result, for good or ill.  Stay tuned!     

Skipping the 401(k) RMD Without Penalty For Those Continuing to Work After Age 70

More than ever, workers are continuing to work into their 70s and beyond.  The general rules governing retirement accounts require nearly every individual account owner to begin taking Required Minimum Distributions (RMDs) by April 1 of the year following the year in which the owner turns 70½.  There exists a notable exception for employer-sponsored 401(k) accounts owned by employees who continue working past age 70½.

If the plan allows, an owner who leaves funds in the 401(k) can avoid RMDs if s/he remains employed with the employer who sponsors the plan.  Moreover, the owner can also continue to make contributions to the 401(k)! 

This exception has some significant requirements, though.  The current employer must sponsor the 401(k);  an owner cannot change employers and defer RMDs beyond age 70½.  In other words, if a former employer sponsors the relevant 401(k), the owner must take RMDs even if continuing to work for another employer that also sponsors a 401(k).  If the owner has more than one 401(k) and the plans allow for rollovers, however, it may be possible to roll all 401(k) funds into the 401(k) of a current employer and delay RMDs on all of the funds if the still working exception applies. Combining accounts will also simplify RMD planning once the owner stops working, because the RMD on each account would have to be determined separately.

The plan, too, must permit the exception.  Because not all 401(k) plans permit the exception, even though permitted by law, an account owner must ensure that his/her plan actually does allow the funds to remain in the plan to avoid a steep 50 percent penalty that apply to missed RMDs.

The exception does not apply if the plan is an IRA (whether a traditional, SEP or SIMPLE IRA).  As an aside, remember that RMDs do not apply to Roth IRAs during the original account owner's lifetime.   

Despite these carefully prescribed and limited conditions, the last condition, that the owner continues to work for the employer, is without a concrete definition, and therefore, may permit flexibility.  Because the IRS does not provide a provides a concrete definition of what it means to continue working past age 70½, it may be possible for an owner to continue working on a reduced-hours or consulting basis and still defer his or her RMDs past the traditional required beginning date.Of course, if special arrangements are crafted by an employer and employee, it is advisable to consult an attorney to document the special relationship in order to ensure that it won't be deemed a sham or fraudulent  arrangement by the IRS.

While an account owner may generally avoid taking RMDs from his or her 401(k) as long as s/he continues working past age 70½, many small business owners are not permitted to take advantage of this exception, because the exception does not apply to participants who are five percent owners of the business sponsoring the retirement plan.  Plan participants  who own a portion of the business sponsoring the 401(k) must also be aware of the constructive ownership rules that apply when determining whether s/he is a five percent owner; interests held by certain members of the owner's family (e.g., spouse, children, parents, etc.) and by certain entities which the owner controls  will be added to the ownership interest of the participant/business owner in determining whether the 5 percent threshold has been crossed.

The above article is based upon an article  published by ThinkAdvisor, which in turn was drawn from Tax Facts Online, and originally published by The National Underwriter Company, a Division of ALM Media, LLC, as well as a sister division of ThinkAdvisor. 

Inherited IRA Not Part of New Jersey Resident's Bankruptcy Estate

A U.S. bankruptcy court determined recently that, at least under New Jersey law, an inherited IRA is not part of the bankruptcy estate, notwithstanding the recent U.S. Supreme Court ruling in Clark v. Rameker. In re: Andolino, (Bankr. D. N.J., No. 13-17238, Feb. 25, 2015).

Christopher Andolino inherited an IRA worth $120,000 from his mother. He later filed for Chapter 13 bankruptcy, and claimed the IRA was an exempt asset.

The bankruptcy trustee objected to Mr. Andolino's bankruptcy plan, asserting that under the Supreme Court's decision in Clark v. Rameker (U.S., No. 13-299, June 13, 2014), inherited IRAs are property of the estate.  To read my previous article on the decision in Clark v. Rameker, click here.

The U.S. Bankruptcy Court, District of New Jersey, held that the inherited IRA is not property of the estate. According to the court, "whereas the inherited IRA at issue in Clark was determined to be an asset of the bankruptcy estate pursuant to nonbankruptcy law, i.e., Wisconsin law, this Court first must apply relevant New Jersey law to determine whether [Mr. Andolino's] inherited IRA is property of the bankruptcy estate." The court determined that under New Jersey law, an inherited IRA does not lose "qualified trust" status, so it is exempt from the bankruptcy estate under federal bankruptcy law.

For the full text of this decision, click here.

Roth IRAs Dim as Inheritance Vehicles- Beware the Rush to Covert

Roth IRA's may sound like a great idea for passing wealth to family members—the funds essentially can grow tax-free over your lifetime and theirs. But, before you rush to convert all or part of a traditional retirement account to a Roth for your loved ones, take a long hard look.

Roth conversions- account holders converting a traditional IRA to a Roth, ostensibly in order to capture the benefit s of tax-free, rather than tax deferred growth, often rely upon a common supporting "story" that requires estate taxes (quite avoidable with good planning), high income taxes on the IRA at death (also for which good planning can make a difference), and healthy returns on the Roth investment to pay the investor back for taxes paid making the conversion(which are sometimes unrealistic, especially over time). It is not uncommon for consumers to believe that their traditional IRA's will suffer extraordinary taxes upon death, 50-75% in many cases! While unquestionably those with large IRA's and estates exceeding five million dollars may witness such excessive tax consequence (federal estate tax, state estate tax, federal income tax, state income tax), the reality for most taxpayers is, fortunately, less severe.

Roth IRAs are not always a good way to pass wealth. Whether such a conversion makes sense depends heavily on tax rates—of both the account owner and heirs—and whether lawmakers approve proposed rule changes that could eliminate some of the estate-planning perks of Roths.

Many people use Roths for bequests because account holders don't have to start taking distributions at age 70½ as they do with traditional IRAs. The money can sit untouched and grow tax-free throughout the owner's lifetime—a big plus for those who don't need the assets to live on. And while those who inherit any type of IRA must start taking distributions immediately, they are permitted to stretch out those payments over their lifetime, allowing the bulk of a Roth account to continue growing tax-free.

Two proposals in President Obama's 2015 budget, if approved, would change all that.

The first would require Roth owners to start taking distributions at age 70½. If that happens the Roth IRA would typically be rendered bereft of value by the time an account holder could leave the asset to an heir.

Inherited IRA's are not Exempt from Creditors in Bankruptcy

In a unanimous opinion, the U.S. Supreme Court has ruled that funds held in an inherited individual retirement account (IRA) are not exempt from creditors in a bankruptcy proceeding because they are not retirement funds. Clark v. Rameker (U.S., No. 13-299, June 13, 2014).

Heidi Heffron-Clark inherited an IRA from her mother. Her inherited IRA had to be distributed within five years, and Ms. Heffron-Clark opted to take monthly distributions. During the five-year period, Ms. Heffron-Clark and her husband filed for bankruptcy and claimed that the IRA, worth around $300,000, was exempt from creditors because bankruptcy law protects retirement funds.

The bankruptcy court found that the IRA was not exempt because an inherited IRA does not contain anyone's retirement funds. Ms. Heffron-Clark appealed, and the district court reversed, ruling that the exemption applies to any account containing funds originally accumulated for retirement. The Seventh Circuit Court of Appeals reversed, holding that the money in the IRA no longer constituted retirement funds, while the Fifth Circuit Court of Appeals decided in In re Chilton (674 F.3d 486 (2012)) that funds from an inherited IRA should be exempt. The U.S. Supreme Court agreed to resolve the conflict.

The U.S. Supreme Court affirmed the Seventh Circuit's decision in Clark, holding that the funds held in inherited IRAs are not "retirement funds." In a unanimous opinion delivered by Justice Sotomayor, the Court finds that funds in an inherited IRA are not set aside for retirement because the holders of inherited IRAs cannot invest additional money in the account, are required to withdraw money from the account even though they aren't close to retirement age, and may withdraw the entire balance of the account at one time.

If you want to ensure that your IRA's are inherited by your heirs and remain exempt from their creditors, see an elder law attorney.  

For the full text of this decision, go to: http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf

IRAs Can Affect Medicaid Eligibility

For many Medicaid applicants, individual retirement accounts (IRAs) are one of their biggest assets. If you do not plan properly, IRAs can count as an available asset and affect Medicaid eligibility.

Medicaid applicants can have only a small amount of assets in order to be eligible to receive benefits ($2,000 in most states). Certain assets -- i.e., a house, car, and burial plot -- are exempt from eligibility determinations. Whether your IRA counts as an exempt asset depends on whether it is in "payout status" or not.

At age 70½, individuals must begin taking required minimum distributions from their IRAs, which means the IRA is in payout status. You may also be able to choose to put your IRA in payout status as young as age 59 ½ if you elect to take regular, periodic distributions based on life expectancy tables. If an IRA is in payout status, depending on your state, it may not count as an available asset for the purposes of Medicaid eligibility, but the payments you receive will count as income. Medicaid recipients are allowed to keep a tiny amount of income for personal use and the rest will go to the nursing home.

If the IRA is not in payout status, the IRA is a non-exempt asset, which means the total amount in the IRA will probably be counted as an asset, affecting your Medicaid eligibility. In order to qualify for Medicaid, you will need to cash out your IRA and spend down the assets. Alternatively, you could transfer the money to your spouse or someone else, although there will likely be an income tax penalty for doing this.  

Note that the rules for a Roth IRA may be different. If you have a Roth IRA, depending on the rules in your state, it may not be exempt at all because Roth IRAs do not require minimum distributions.

The rules regarding IRAs and Medicaid are complicated and vary from state to state. You should talk to your attorney about your IRA to determine the best course of action for you. 

For more information on retirement planning, click here.

For more on Medicaid's rules, click here.

MyRA?

President Obama announced a new retirement savings program for people who do not currently have an employer-sponsored plan during his 2014 State of the Union message. The new investment product, called myRA, is a starter savings account aimed at low- and middle- income workers.

Similar to a Roth IRA, the myRA accounts will allow workers to invest money after tax and withdraw the money in retirement tax-free. Unlike a Roth IRA, however, the savings will be backed up by U.S. Treasury bonds, so investors will have a safer investment alternative designed never to risk the principal investment. The accounts, which are voluntary, will be available to married couples with modified adjusted gross incomes up to $191,000 and to individuals earning up to $129,000.

Workers can open a myRA with a minimal initial $25 investment. The plans are funded through paycheck deductions with contributions as small as $5 at a time. Savers will earn variable interest on the accounts, and there are no fees on the account. Principal contributed to the account can be withdrawn without penalty at any time.  There will be a penalty, however, for withdrawing the earnings i.e., interest, from the account before age 59 1/2. 

Once an account holder has accumulated $15,000, the account holder must roll the account into a traditional Roth IRA, which will then be subject those rules. In addition, the accounts last only 30 years, so at the end of that time the funds must be rolled into a traditional Roth IRA, even if the $15,000 maximum limit has not been reached.  It is unclear whether an account holder can open a new account after a period of time in order to avoid contributions being rolled up, and subject to traditional Roth IRA withdrawal rules.  

Employees who switch jobs will be able to keep their myRA accounts without cashing them out. Workers would also be able to contribute to the same account from multiple part-time jobs. The new accounts will initially be offered through a pilot program with employers who choose to participate and should be available at the end of the year.

Critics contend that the myRA initiative will do little to address the retirement savings gap because enrollment will not be automatic and contributions will be invested only in low-return Treasuries.  The requirements that the myRA rolls up into a traditional Roth IRA at either the $15,000 limitation or upon thirty years is at best going to create confusion.  At worst it will cause account participants to mistake the flexibility and ease of the accounts prior to roll-up in planning, and fail to carefully consider the more cumbersome rules governing Roth IRA distributions after roll-up.  Unexpected tax consequences may follow.

"Qualified" distributions from a Roth IRA are not included in gross income for individual tax purposes. That is deceivingly simple: a "qualified" distribution from a Roth IRA is tax-free, i.e., no taxes due on the principal, and no taxes due on the earnings.

The reason that "simple" is deceiving is the rules that define a qualified distribution.  To be qualified, the distribution MUST be:

• Made on or after the date you become age 59 1/2; OR
• Made to your beneficiary, or to your estate, after you die; OR
• Made to you after you become disabled within the definition of the IRS code; OR
• Used to pay for qualified first-time homebuyer expenses.

But,  even if one of the qualifications above are met, the distribution is STILL not qualified if it is made within a five-tax-year period. Complicating matters further is that tax-years are NOT necessarily the same as five calendar years.

So, in effect, there are two sets of rules that must be met before a Roth IRA distribution becomes qualified, and therefore tax-free: The distribution rules and the five-tax-year rules. Unless both sets of rules are met, the distribution will NOT be qualified, and the earnings will be subject to tax, and possibly penalties.

The direct investment in treasuries may be a safer alternative for many investors, and it will benefit the treasury by encouraging direct investment.  But, is the myRA an example of the government giving with one hand only to take with the other?  Perhaps, only time will tell. 

For the press release detailing the new myRA account, click here.

Supreme Court to Decide Whether Inherited IRA's Protected from Creditors

The U.S. Supreme Court has agreed to hear a case that will decide whether inherited individual retirement accounts (IRAs) are available to creditors in bankruptcy. The decision in Clark v. Rameker will resolve a split between the lower courts.

Heidi Heffron-Clark inherited a $300,000 IRA from her mother. Inherited IRAs must be distributed within five years. During the five-year period, Mrs. Clark and her husband filed for bankruptcy. The Clarks argued the IRA was exempt from creditors because bankruptcy law protects retirement funds. A district court agreed with the Clarks, but the 7th Circuit U.S. Court of Appeals reversed in Clark v. Rameker (714 F.3d 559 (2013)), holding that the money in the IRA no longer constituted retirement funds.

Meanwhile, the 5th Circuit U.S. Court of Appeals decided in In re Chilton (674 F.3d 486 (2012)), that funds from an inherited IRA should be exempt. The U.S. Supreme Court will resolve this issue later this term.

For more information about this case, click here.

IRS Reminder: 2010 Roth Conversions May Require Income Reporting on 2012 Return

The Internal Revenue Service reminds taxpayers who converted amounts to a Roth IRA or designated Roth account in 2010 that in most cases they must report half of the resulting taxable income on their 2012 returns.

Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on a 2012 return. But under a special rule that applied only to 2010 conversions, taxpayers generally include half the taxable amount in their income for 2011 and half for 2012, unless they chose to include all of it in income on their 2010 return.

Roth conversions in 2010 from traditional IRAs are shown on 2012 Form 1040, Line 15b, or Form 1040A, Line 11b. Conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts, are reported on Form 1040, Line 16b, or Form 1040A, Line 12b.

Taxpayers who also received Roth distributions in either 2010 or 2011 may be able to report a smaller taxable amount for 2012. For details, see the discussion under 2012 Reporting of 2010 Roth Rollovers and Conversions on IRS.gov. In addition, worksheets and examples can be found in Publication 590 for Roth IRA conversions and Publication 575 for conversions to designated Roth accounts.

Taxpayers who made Roth conversions in 2012 or are planning to do so in 2013 or later years must file Form 8606 to report the conversion.

As in 2010 and 2011, income limits no longer apply to Roth IRA conversions.