What happens to these assets if Medicaid is needed?

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Q. I’m 59 and my husband is 72. I have a 403(b), Roth and traditional IRAs, some money in a checking account, life insurance and a pension upon retirement. My husband is on Social Security and has life insurance policy but has no retirement savings. We have a paid-off home. We are both pretty healthy. I’m trying to figure out how to handle beneficiaries. If I have him as my beneficiary and I pass away, it goes to him but if he needs a nursing home, the nursing home gets everything. Or should I make my husband and two kids — 31 and 26 — all equal beneficiaries so some money is protected? And what happens with taxes?
— Uncertain

A. If you’re talking about the best way to protect assets in the event that your husband needs nursing home or even in-home care, Medicaid is important to understand.

Medicaid is a joint state and federal program that can pay for long-term nursing home care, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

It is intended to help low-income and low-wealth individuals.

It generally won’t pay for care on behalf of individuals who have significant wealth until after they spend it down on their own care, DeFelice said.

The rules for Medicaid vary significantly by state.

“In New Jersey, which is an impossibly difficult state in which to qualify for Medicaid, the 2021 requirements for eligibility are an income limit of $2,382 per month, which includes Social Security, pensions and retirement account distributions, and an asset limit of $2,000 for the applicant and $130,380 for the non-applicant,” he said. “Additionally, New Jersey does not offer any special protection for retirement plans and IRAs.”

You didn’t say how much money you would potentially be leaving to your beneficiaries, but DeFelice said it seems like naming your husband would make him ineligible for Medicaid until the funds are spent down, DeFelice said.

“It should be noted that in New Jersey, a spouse’s retirement assets also count towards Medicaid eligibility, so if you are still alive and he needs care, your retirement accounts are all free game, so to speak, whether you named your children as beneficiaries or not,” DeFelice said.

Given that your husband is 13 years your senior, the probability under normal circumstances is that he will pass away first.

In the unlikely event that you predecease your husband, naming your children as beneficiaries of your retirement accounts and life insurance would keep those assets out of his name and help with Medicaid eligibility if he needs it, DeFelice said.

But you have to ask yourself if your husband would be able to live on his Social Security alone if he lives his remaining days in good health without ever needing nursing home care or home aides.

Of course your children could in turn give him money as needed to help, but that gets sticky and complicated from a gift/income tax perspective, and they would be under no legal obligation to do so, DeFelice said.

“If you are both in relatively good health, your best option to handle the risk of one or both of you needing some type of care may be to simply purchase a traditional long term care insurance policy for each of you,” he said. “Spouses applying together will receive a discount on their premium, and a reasonably priced policy can be integrated into a financial/estate plan that alleviates all these concerns.”

The biggest key is to plan for how you will manage these risks well in advance when you are both healthy, he said.

Next, let’s talk taxes.

Generally, any assets not held in an irrevocable trust, as well as proceeds from individually-owned life insurance policies, are included in your taxable estate, DeFelice said.

However, the good news is that you get a healthy exemption from the government. For 2021, the personal federal estate tax exemption amount is $11.7 million, he said.

“This means that when you pass away, the value of your estate is calculated and any amount more than $11.7 million is subject to the federal estate tax unless otherwise excluded,” he said. “A married couple has a combined exemption for 2021 of $23.4 million.”

Additionally, the state of New Jersey no longer charges estate taxes and also has no inheritance tax for Class A beneficiaries — spouses, domestic and civil union partners, children, grandchildren, great-grandchildren, stepchildren, parents and grandparents, he said.

These exemptions effectively eliminate estate tax concerns for the majority of people.

Life insurance proceeds will pass income-tax free to the listed beneficiaries, DeFelice said.

But the funds in your 403(b) and traditional IRA still need to be taxed as income.

“If your spouse is the beneficiary, he may continue to take minimal withdrawals to satisfy Required Minimum Distributions (RMDs), but any distributions will still be taxed as income,” he said.

This would be the same for your children, but with the passage of the SECURE Act, IRA and 403(b) distributions to a non-spouse must be completed within 10 years following the death of the account owner, and income tax would need to be paid, he said.

Your Roth IRA was funded with after-tax dollars, so as long as the funds have been in the account for at least five years since your last contribution, the full distributions would be tax-free to your husband or your children, DeFelice said. Your children would still be subject to withdrawing the funds within a 10-year period, but no 10% early withdrawal penalty would apply.

“As you can see, these are complex planning issues,” DeFelice said. “You should consult with a state Medicaid law expert and a certified financial planner professional who can work with you to coordinate a plan to protect your family, and about using any of the ideas given here before acting.”

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This story was originally published on Sept. 27, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.