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 Principal contributed to the account can be withdrawn without penalty at any time.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.

Appealing Medicare Refusal to Cover Care

Sometimes Medicare will decide that a particular treatment or service is not covered and will deny a beneficiary's claim. Many of these decisions are highly subjective and involve determining, for example, what is "medically and reasonably necessary" or what constitutes "custodial care." If a beneficiary disagrees with a decision, there are reconsideration and appeals procedures within the Medicare program.

While the federal government makes the rules about Medicare, the day-to-day administration and operation of the Medicare program are handled by private insurance companies that have contracted with the government. In the case of Medicare Part A, these insurers are called "intermediaries," and in the case of Medicare Part B they are referred to as "carriers." In addition, the government contracts with committees of physicians -- quality improvement organizations (QIOs) -- to decide the appropriateness of care received by most Medicare beneficiaries who are inpatients in hospitals.

For more, click here to travel to my newsletter article!

What Are the House Ownership Options When Parents and Adult Children Live Together?

Bailey House,  Somers Hamlet Historic District
in Somers, NY, USA

Increasingly, several generations of American families are living together. According to a Pew Research Center analysis of U.S. Census data, more than 50 million Americans, or almost 17 percent of the population, live in households containing two adult generations. These multi-generational living arrangements present legal and financial challenges around home ownership.

Multi-generational households may include "boomerang" children who return home after college or other forays out into the world, middle-aged children who have lost jobs in the recent recession, or seniors who no longer can or want to live alone. In many, if not most, cases when mom moves in with daughter and son-in-law or daughter and son-in-law move in with mom, everything works out well for all concerned. But it's important that everyone, including siblings living elsewhere, find answers to questions like these:

For more, click here to travel to my newsletter article!

Using a No-Contest Clause to Prevent Heirs from Challenging a Will or Trust

Property of Darrellksr From Wikimedia Commons

If you are worried that disappointed heirs could contest your will or trust after you die, one option is to include a "no-contest clause" in your estate planning documents. A no-contest clause provides that if an heir challenges the will or trust and loses, then he or she will get nothing.

A simple "no-contest clause" will protect only the instrument, such as the trust or will.  An enhanced "no-contest clause" will identify and protect other estate planning decisions, such as a beneficiary designation of an annuity, retirement plan, IRA, Keogh, pension or profit-sharing plan or insurance policy,  a buy-sell agreement, a family partnership agreement, a limited liability company, or a marital agreement (pre- or post- nuptial), and may even penalize family members that conspire to frustrate the estate plan.

For more, click here to travel to my newsletter article!

Understanding the Medicaid Look-back Period

Medicaid uses a "look-back" period in determining Medicaid eligibility.  Medicaid, unlike Medicare, is a means-tested program, which means that you are only eligible for it if you do not have sufficient means, or have very few assets. The government does not permit the transfer all of a person's assets in order to qualify for Medicaid, so it has imposed a penalty on people who transfer assets without receiving fair value in return, often called a transfer penalty.  Transfers of assets for less than fair market value are considered "improper transfers."

In order to identify who has transferred assets, states require a person applying for Medicaid to disclose all financial transactions he or she was involved in during the five (5) years immediately prior to submitting the Medicaid application. This five-year period is known as the "look-back period." The Department of Medicaid or other appropriate state agency determines whether the Medicaid applicant transferred any assets for less than fair market value during this period.

Any transfer can be scrutinized, no matter how small. There is no exception for charitable giving or gifts to grandchildren. Informal payments to a caregiver may be considered a transfer for less than fair market value if there is no written private care agreement, and even these are scrutinized carefully. Similarly, loans to family members can trigger a penalty period if there is no written documentation establishing the existence and reasonableness of the loan. The burden of proof is on the Medicaid applicant to prove that the transfer was not made in order to qualify for Medicaid.

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility even if the transfers occurred during the look-back period. These exempt recipients include the following:

• A spouse (or a transfer to anyone else as long as it is for the spouse's benefit);
• A blind or disabled child;
• A trust for the benefit of a blind or disabled child;
• A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).  

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

• The applicant's spouse;
• A child who is under age 21 or who is blind or disabled;
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances);
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home;
• A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

If the state Medicaid agency determines that a Medicaid applicant made a transfer for less than fair market value, it will impose a penalty period. This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.

Transfers to a person's revocable trust are not considered improper transfers, because they do not affect "ownership" for purposes of Medicaid.  In other words, a revocable trust is not a Medicaid planning trust and does not shield assets from Medicaid spend down.  In Ohio, a couple may apply for and receive Medicaid if the home is in their revocable trust, due to changes to the law in 2016.  An attorney should be consulted nonetheless because leaving a home in a trust after Medicaid eligibility can be disadvantageous and inadvisable, of course depending upon the trust terms.  Consult an attorney when applying for Medicaid, and after eligibility to ensure proper management of the assets.  

If you have transferred assets within the past five years and are planning on applying for Medicaid, consult with your attorney to find out if there are any steps you can take to prevent incurring a penalty.

Revised 12/1/16