Retirement Accounts – More Than the Minimum Required Distributions?
December 28, 2009
The fact that we are living longer than our parents and grandparents is changing so many aspects of our lives. One area that will be impacted by this longevity is retirement accounts. So many of our clients have it ingrained in their minds that they must not touch their retirement accounts. They withdraw only the minimum amount each year that the government says they must, what is known as minimum required distributions. But is that really the best approach?
Retirement accounts enjoy tax deferred status. The tax that one owes on the growth of these accounts is not paid until the money is withdrawn from the account. The thinking goes that by withdrawing the money after retirement there will be less in taxes because the retiree will be in a lower tax bracket than during working years. Many also view their accounts as something they want to pass on as an inheritance to children and other loved ones. This combination results in the “I don’t want to withdraw anything” attitude.
For so many of our clients, the majority of their investments sit in retirement accounts. This makes their failure to plan for long term care more acute because if we want to protect assets, by using trusts, for example, we must move those assets out of the retirement accounts. Doing so, however, can cause a large tax bill, one that most are reluctant to pay, thinking that, they’ll never really need long term care, or they’ll wait till it happens. Waiting, however, can cause disastrous results.
Moving through the 21st century as a greater number of people live 20, 30 or even 40 years in retirement, we may need to reconsider how we use our retirement accounts. Maybe it isn’t best to keep the money in the account as long as possible with the specter of long term care on the horizon. Perhaps it might be better to start withdrawing funds soon after retirement, rather than gambling that we won’t need long term care. Guessing wrong will likely result in the loss of more than just the tax on the withdrawals, perhaps even the entire account towards the cost of long term care.
As one advisor I know put it, we forget that not all the money in the account is ours. If we recognize that, roughly one third of the money is Uncle Sam’s it is easier to accept the tax bill that comes with withdrawing funds. Of course, this is not a one size fits all situation. Everyone needs to consider the matter individually based on their own set of facts. But, when our thinking on such an important decision becomes so automatic, we need to go back and examine the wisdom of that approach because times are definitely changing and we need to adjust with them.
How We Recovered $240,000
December 21, 2009
Jane called because she was flat out of money and desperate. Dad had been in a nursing facility for almost 4 years now. He had spent down his money and Jane had paid the $11,000 per month expense after that, until she was tapped out of her home equity line of credit to the tune of $240,000. Dad owned a home, which Jane had always figured she would eventually sell and reimburse to herself the money she had advanced. She was panicked, however, after someone told her that she might not get that money back because Medicaid would “take the house”. She called us after a friend told her to speak with an elder law attorney.
Jane definitely had a problem. While Medicaid doesn’t “take” the home, when Dad starts to receive Medicaid benefits the State runs a tab, so to speak. That tab comes due when he dies, under what is called “estate recovery”, and the State will get paid first when the home is sold because Jane didn’t have a mortgage to protect her $240,000 loan to Dad. So each month that Dad receives Medicaid benefits is money that Jane will lose, because the house is only worth $250,000. I told Jane not to worry. I had a solution, but we had to work quickly before we filed a Medicaid application. Here’s what we did.
Jane had no problem documenting the payments on Dad’s behalf. The nursing facility provided us with a payment history as well. We first had Jane and Dad enter into a loan agreement backed by a mortgage which we recorded on Dad’s home. A realtor provided us with documentation showing that Jane had listed Dad’s home for sale for about a year and had to continually lower the asking price which was now $250,000. We needed this to establish the fair market value.
Jane then entered into a contract to purchase Dad’s home for $250,000. We represented Dad and Jane hired her own attorney. It had to be, what attorneys refer to as an “arm’s length transaction” with all the usual realty transfer fees and recording costs. Jane’s payment for the home was the $240,000 she paid to the nursing home plus Dad’s closing costs (which she paid).
Finally, we applied for Medicaid, disclosing all the above transactions. Medicaid definitely examined it closely. But we had the documentation to back everything up. This was not a case of Dad gifting Jane $250,000. Jane had paid full value for the home and Dad had used the money to pay for his care. In the end, however, I am proud to say that Medicaid approved our application and Jane did get back her $240,000. And the State can’t be unhappy either, since Dad used every last dollar for his care before reaching out for government benefits.
Jane was lucky but I don’t recommend waiting until she did to reach out for help. Had she handled the Medicaid application herself, she likely would have lost tens of thousands of dollars, and possibly all of the money she spent. And since Jane, herself, is 65, that’s money she’ll need for her own care needs in the not too distant future.
How $250,000 Went Up in Smoke
December 14, 2009
Mary’s husband Joe, passed away several years ago but she continued to live in the home where they had raised their family. Mary was now struggling with the effects of dementia. But she wouldn’t hear of it when her children talked about moving her to a safer environment. So they arranged for a home aide to provide some assistance. However, Mary had no other assets from which to pay for care so her children chipped in. Nevertheless, Mary was home alone for long periods of time. And that’s when tragedy struck.
Mary was using the stove and, although no one is really sure how it happened, the fire originated in the kitchen. The home was destroyed. Miraculously, Mary escaped serious injury. The family considered themselves lucky. They now knew, almost too late, that Mom needed more supervision. They planned to take the homeowners insurance money and use it to place her in an assisted living facility. That’s when Mary’s family got a second shock.
You see, Mary had never increased the insurance limits on her home. As its value increased, along with the costs of material and labor to rebuild, her policy limits remained unchanged. So, all she received from the insurance company was $100,000, even though the fair market value of the now destroyed home was over $500,000.
When Mary sells the now vacant lot, she’ll get a bit more cash to help pay her long term care needs, but it won’t be anywhere near $400,000. The end result is that Mary lost at least a quarter of a million dollars in that fire along with the rest of her belongings. There is now a greater chance that she’ll run out of money. So, while Mary and her family were lucky that she escaped the fire with her health intact she wasn’t so lucky when it comes to her finances. She now is much worse off than her family could have ever imagined.
There are a couple of lessons to be learned here. First, make sure you check your insurance coverages and keep them up to date. But, the broader lesson to be taken from this tragedy is that a failure to act can have catastrophic consequences far worse than the decisions you are trying to avoid making. As the saying goes, “a failure to plan is a plan for failure”.
Is Long Term Care More Important to Women Than Men?
December 7, 2009
I could hear the panic in Mary’s voice. Her husband Joe’s health had been steadily declining for years and Mary has been his primary
caregiver. But last week he fell at home, breaking his hip, and now he’s in a subacute facility. The recovery process hasn’t gone well, in part because of Joe’s age and partly because of the toll that Alzheimer’s has taken on his mind. Mary is now facing the prospect of either long term care at a cost of $11,000 per month or, in an effort to keep the cost down, trying to bring him home and provide much of the care herself, supplementing it with a few hours of home aide assistance. “Joe never wanted to talk about long term care and so we never did plan for this,” she tells me. It’s a classic scenario and one that, so often, is more damaging to the wife than the husband. How so?
Mary’s situation is a typical one. At 72, she’s 6 years younger than Joe. Add the fact that women have a longer life expectancy than men and chances are that the husband will need long term care first. And if the couple haven’t planned for it, they’ll likely spend most of their savings on his care. Mary and Joe have $400,000 of assets plus their house. Without any guidance Mary could be left with as little as $109,000 and the house before the State will help pay for Joe’s care.
