11 Apr Future Success Story Of The Month? Will A QLAC Within An Ira Become The Latest Tool To Save Money In Care Costs?
Recent changes under the Secure Act 2.0 that became effective January 1, 2023 may make a QLAC (Qualified Longevity Annuity Contract) a planning option for long-term care Medicaid which helps pay for nursing care and care at home.
A QLAC is an annuity within your retirement account which reduces your required minimum distribution (RMD) until a later date – even as late as age 85. You no longer have a capped percentage (previously it was 25%) of the IRA that you can purchase. The Secure Act 2.0 now allows up to $200,000 of the retirement account to be a QLAC.
The largest asset of most is either a homestead or an IRA. Most Americans do not have long-term care insurance or adequate income to pay for care and Medicare has very limited coverage. If governmental assistance through Medicaid is desired to help pay for care (either at a nursing home or at home), many plan to obtain eligibility for this means-tested benefit by simply converting countable resources such as cash into a non-countable resource such as a homestead (assuming there is an intent to return home) by paying any mortgage balance or making repairs or improvements to the home.
An IRA is also a non-countable resource for Medicaid eligibility in Texas provided there is a required minimum distribution (RMD) which is the time an owner must take an RMD (or there is an excise tax). Although the IRA doesn’t count if there is an RMD, the distribution of income counts toward the Medicaid income cap (which is presently $2742 per month) in the month of receipt. If the applicant’s income is over the $2742 income cap, then a qualified income trust (QIT) would be needed for eligibility. If the applicant is single and in a nursing home, the applicant’s income, minus a few deductions, would be the applicant’s co-payment to the nursing home and the government would subsidize the balance.
So, for example, if the applicant’s monthly gross Social Security was $2000 per month and the IRA distribution for the month was $1000, the applicant’s income ($3000) would be over the cap ($2742) and a QIT would be needed. However, what if a QLAC was purchased and income was deferred? To satisfy the state’s requirement that an IRA distribution must be made for an IRA to be a non-countable resource, a partial amount (i.e. ½) of the IRA distribution ($500 in this example) would be distributed and the other ½ ($500) would be deferred until the owner is older as a result of the QLAC purchase. So, in this example, a QIT would not be needed (since the income would be less than $2742) and less would be paid to the skilled nursing facility. Also, the named beneficiary or beneficiaries would inherit more since an IRA with a beneficiary designation avoids Medicaid Estate Recovery (the state goes after assets that pass by will or intestacy and as a result of the beneficiary designation, it would be distributed directly to the beneficiaries after the death of the owner).
This strategy has likely never been used, and it is uncertain that it would be successful. However, it can be envisioned that this could be successful and be a common tool if one potential client is willing to be the first to try.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.