Tending to your IRA during life and beyond
For most of the baby boomers and future generations, 401(k) or other taxdeferred employer savings plan — which eventually will “transform” into an individual retirement account — are their most valuable asset. Yet, what have we really done to tend to this cornerstone of their financial future?
Estate planning: Many people — although quite a few less than you would think — have a last will and testament. This may be a good start to developing your estate plan.
But, in reality, your IRA transfers at death to the named beneficiary and is not directed by a will. In fact, there can be drastic income tax consequences for IRAs that pass through the estate of a decedent. This will occur if you fail to name a beneficiary.
In many contexts, it’s not appropriate to simply name a beneficiary of your IRA to transfer its value someday. For example, do you really want young children, an adult disabled child, an adult child with a rocky marriage, or an elderly spouse with a cognitive disability to inherit a substantial IRA outright?
Fortunately, the IRS has relaxed the rules in the past decade, allowing one to leave an IRA in a trust for the benefit of another person while still maintaining the tax benefits. In addition, this technique allows the original owner of the account to restrict its future use
among generations so these funds can stay in the family for an extended period.
At the center of IRA planning is strategic beneficiary designations. The combination of using a trust to “catch” an account combined with strategic primary and secondary beneficiary designations can create an insulated nest egg for future generations. Long-term care considerations: So, you spend 30+ years working to build that nest egg IRA, only to find that someday you (and statistically half of us) will need expensive long-term care either in your home or a facility.
As we’ve written in prior columns, these costs can be over $100,000 per year and traditional health insurance such as Medicare barely covers anything.
While Medicaid covers long-term care, a person who owns an IRA must reduce that account to about $2,000 before being able to qualify for Medicaid. By the time the crisis occurs, the options for salvaging the value are limited, although there are still options
What are the proactive options for protecting the value of your IRA from the costs of long-term care? The two most popular solutions involve insurance. The traditional route is to purchase insurance to cover a significant portion of the longterm care costs from an available “bucket” of money. However, many people either can’t afford the premiums over time or can’t qualify medically.
There’s also a strong sentiment against purchasing a policy that may never pay benefits if long-term care is not needed. Note, however, that it’s sort of like fire insurance on your house; you don’t need it or care about it until your house burns..
The long-term care insurance market has changed significantly in just the last few years, so you may want to investigate the types of new products on the market that are designed to address these concerns.
Another option we have seen is simply to “insure” your IRA by purchasing a life insurance policy to replace the IRA’s value in the event that you must spend down a significant portion of your account for longterm care costs.
Generally, life insurance is more predictable, will pay benefits someday and has more favorable medical underwriting guidelines.
Purchasing the insurance is not quite enough to ensure the legacy. If a Medicaid spenddown is necessary, the life insurance policy could be exposed. Therefore, when using this technique, it is advisable that the IRA owner or spouse does not own the insurance policy.
Rather, we like to use a protective trust to own the life insurance policy. Besides protecting the policy from long-term care spend down, the trust can provide a road map for protecting the funds for your family.
In summary, if your IRA is one of your most valuable assets, there’s more involved than just selecting an investment and naming a beneficiary. Investigate the options to maximize the protection of your IRA for you, your spouse and future generations.