Married IRA owners should update estate plans

Married IRA owners should update estate plans to address tax law changes under the SECURE Act passed by Congress in Dec. 2019. Indiana couples should especially update plans because of Indiana’s undocumented Medicaid policy shift on IRAs in Jan. 2020. This article reviews key SECURE Act changes to IRA taxation and explains the new Indiana Medicaid policy’s impact on couples’ IRAs.

Why blog on the SECURE Act again?

We said married IRA owners should update estate plans and reconsider their IRA strategies in our Dec. 2019 article, SECURE Act Changes To IRAs . Our follow-up article, SECURE Act Changes Education Savings Plans, explained other important tax law changes for education funding. We didn’t intend to write a third consecutive SECURE Act article, but married IRA owners need to know how Indiana’s abrupt Medicaid policy shift may affect them.

First, we will review the SECURE Act taxation changes as a backdrop for the Medicaid issue.

SECURE Act IRA taxation changes

SECURE Act Overview:

President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (appearing in the “Further Consolidated Appropriations Act, 2020” at Division O) on Dec. 20, 2019. The SECURE Act revises former IRA tax laws, including these big changes: increases the age for the “Required Beginning Date” when an IRA owner must begin withdrawing the “Required Minimum Distribution” (RMD) from age 70 ½ to age 72; allows an IRA owner to continue making tax-deductible IRA contributions after age 72; an IRA owner can still make begin making qualified charitable distributions (QCDs) from an IRA after age 70 ½ up to a total of $100,000 each year, but the annual Q CD value drops by the total annual value of the owner’s tax-deductible IRA contributions (see Giving Your Taxes to Charities); and an IRA beneficiary, other than a surviving spouse or one of the other categories of “Eligible Designated Beneficiaries,” must withdraw the beneficiary’s entire share of an inherited IRA (including a Roth IRA) within 10 years after the IRA owner’s death.

Death of the Stretch IRA Strategy

The SECURE Act’s 10-year inherited IRA withdrawal requirement eliminates the “Stretch IRA” strategy. The Stretch IRA strategy allowed beneficiaries to withdraw their inherited IRA shares over their life expectancies. A young IRA beneficiary could stretch distributions so thinly that the IRA could grow faster than the distributions could deplete it.

The Stretch IRA strategy elimination concentrates a beneficiary’s required withdrawal of taxable IRA funds into a single decade may increase the beneficiary’s income tax rate. retirees should now consider increasing IRA withdrawals and converting IRAs to Roth accounts to reduce future tax burdens on their IRA beneficiaries.

Indiana’s abrupt Medicaid policy reversal

We last described Indiana’s tendency to change its Medicaid policies abruptly in our updated Dec. 2018 article, Indiana Cancels Favorable Medicaid Policy on IRAs. That update reported the state’s abrupt reversal of an unexpected Indiana Medicaid policy that the state had changed about nursing home residents’ IRAs less than 9 months earlier. We report now that Indiana abruptly changed a related policy about IRAs owned by nursing home residents’ spouses in Jan. 2020.

Countable resources affecting a nursing home resident’s Medicaid eligibility

An unmarried nursing home resident must not have more than $2,000 worth of assets that are countable as “resources.” A married nursing home resident (the “Institutional Spouse”) is still limited to resources worth no more than $2,000, but the resident’s spouse living outside of the nursing home (the “Community Spouse”) may also keep the lesser of half the couple’s resources or a maximum resource allowance ($128,640 as of Jan. 1, 2020). Indiana General resource exemptions include one vehicle, certain items of personal property and any amount of real estate that produces income. Resource exemptions for married couples also include any real estate owned by the Community Spouse. After Indiana approves an Institutional Spouse’s Medicaid application, the Community Spouse may have an unlimited value of resources without disrupting the Institutional Spouse’s Medicaid eligibility.

Shifting sands of Indiana Medicaid resource policies on IRAs

Indiana began exempting a Community Spouse’s IRA from the couple’s resource assessment values in June 2014. The spring 2018 exemption of a Medicaid applicant’s IRA that issued a regular monthly distribution pleasantly surprised Indiana’s elder law community, but the reversal of that policy in December 2018 disrupted Medicaid applications that relied on that exemption.

Medicaid strategies for an Institutional Spouse’s IRA after 2018

Institutional spouse’s alternatives returned to just three choices after 2018:

Liquidate the IRA account, pay taxes on the entire value, and transfer the remaining funds to the Community Spouse; reinvest the IRA into an “immediate” annuity that would generate a monthly payment and would not allow the Institutional Spouse to withdraw or liquidate the principal value of the IRA account; or petition a court to declare the couple legally separated and allow the Institutional Spouse to transfer the IRA to the Community Spouse to avoid taxation (see Family Law Solutions For Elder Law Problems).

Indiana’s January 2020 Medicaid policy reversal on Community Spouse IRAs

Section 2615.15.00 of the Indiana Health Coverage Program Policy Manual (IHCPPM) currently says, “Effective June 1, 2014, retirement accounts of an ineligible spouse or ineligible parent are not considered countable for MED 1.” However, the Medicaid policy officials of Indiana’s Family and Social Services Administration (FSSA) met on Jan. 23, 2020, and decided to reverse that policy. When we spoke with officials in local FSSA offices around the state the following week, they reported that the policy officials had instructed them to begin counting a community spouse’s IRA even though the IHCPPM had not yet been updated with that information. As of Feb. 8, 2020, the IHCPPM still contains that overruled exemption provision.

Married IRA owners should update estate plans to reduce IRA tax risks in long term care situations

Married IRA owners should update estate plans to reduce the tax consequences that may result if a spouse needs nursing home care. Otherwise, a couple may face big tax burdens if they must liquidate their IRAs suddenly to pay for an institutional spouse’s nursing home care or qualify for Medicaid. Estate plan update alternatives include these options: reduce the size of IRA accounts by taking larger withdrawals than the RMD amounts even though the larger withdrawals trigger larger income tax obligations (see Have You Withdrawn Enough from Your IRA This Year?); convert traditional IRA accounts to Roth IRA accounts and pay income taxes on the converted values in order to continue growing the account values in the Roth IRA’s tax-sheltered environment (see Secure Act IRA Changes – A Mixed Bag); and make a will with testamentary trust provisions for the IRA owner’s spouse and designate the trust as the IRA beneficiary to prevent IRA from being included among the spouse’s countable resources if the IRA owner dies and the surviving spouse requires nursing home care in the future (see Spendthrift, Special Needs, “Miller” and Other Protective Trusts).

All of changes in law present complex tax issues that require careful analysis and planning. We encourage people to consult with knowledgeable tax advisors and elder law attorneys before taking any particular action on IRA account.

About the Authors

Jeff R. Hawkins and Jennifer J. Hawkins are Trust and Estate Specialty Board Certified Indiana Trust and Estate Lawyers. They are also active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys.

Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois.

Jeff is a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation. He is also a member of the Illinois State Bar Association and the Indiana Association of Mediators. He served as the 2014-15 President of the Indiana State Bar Association, and he is a registered civil mediator.

Hawkins Elder Law is one of the few elder law firms that Martindale-Hubbell TM has rated AV Preeminent, with both of the firm’s lawyers (Jeff Hawkins and Jennifer Hawkins) also rated AV Preeminent.

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