Elder Parents and Trusts/Investments

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iZibSolutions
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Elder Parents and Trusts/Investments

Post by iZibSolutions »

My parents (early 70’s) have set up an irrevocable trust with my sister and I as the Trustees. My parents both have social security and pensions that more than cover their cost of living and have another savings account set aside if they were to need it.

Currently in the trust is:
- 165k invested with Edward Jones (this will be moved out of Edward Jones)
- 180k in cash in a bank account
- Their home

Not currently in the trust is:
- 215k in IRAs
- 55k in Roth IRAs

The question is what would be the best thing to do with the money that is not currently in the trust. We are trying to protect against taxes and Medicaid (5 year look back). To be clear, we will keep the money allotted for them if ever needed. For Medicaid, we are wanting to have options of care, etc rather than being forced.

Both of these would be invested in smiler risk investments as they are now.

- IRA’s - Our thought is to take this money out over two years so that they do not exceed the MAGI limits for Medicare premium increases.
- Yes they will have to pay taxes, but if it is transferred to us, the tax bracket will be much higher when we take it out.
- Once they pay taxes on it, we would only pay capital gains taxes on it going forward.
- Roth IRA’s - Taking this out would simply be to protect against medicaid and the 5 year look back.
- We are aware that we would then be paying capital gains taxes going forward.

Any other thoughts on this or anything that we might have overlooked? Any advise is appreciated.

Thanks,
Zach
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arcticpineapplecorp.
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Re: Elder Parents and Trusts/Investments

Post by arcticpineapplecorp. »

have you consulted with an elder law attorney? if you're trying to protect assets from medicaid, that's what you need to do. contact an elder law attorney that specializes in medicaid policies in your parents' state of residence.
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dbr
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Re: Elder Parents and Trusts/Investments

Post by dbr »

Getting rid of money so one can qualify for Medicaid is a bottom of the barrel strategy for people who don't have the resources to do better.

Is this really what your parents want? With the home your parents likely have around $1M or more to pay for decent assisted support when they need it. Besides that people with pensions and SS are not going to be on Medicaid anyway, not even close. In my state the income limit for programs like Elderly Waiver is around $2000/month from SS, pensions, investments, and anything else.

Yes, this needs to be taken up with an elder care lawyer and it might be time to scout out the options with assisted living and more.
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iZibSolutions
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Re: Elder Parents and Trusts/Investments

Post by iZibSolutions »

Yes they have an eldercare attorney, he is the one that set up the trust. He is also the one that is recommending transferring assets to the trust. His reasoning is that they do not have enough money to likely cover an extended nursing home stay on their own. By transferring assets, we could use the money to provide a private room, etc for them where medicaid would not.
dbr
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Re: Elder Parents and Trusts/Investments

Post by dbr »

iZibSolutions wrote: Mon Jun 27, 2022 12:22 pm Yes they have an eldercare attorney, he is the one that set up the trust. He is also the one that is recommending transferring assets to the trust. His reasoning is that they do not have enough money to likely cover an extended nursing home stay on their own. By transferring assets, we could use the money to provide a private room, etc for them where medicaid would not.
Just to confirm with no pejorative comments, the recommendation of the elder care attorney is to divest assets so that one can qualify for Medicaid benefits and then upgrade the level of accomodation by having you cover the extra costs from the trust?
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iZibSolutions
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Re: Elder Parents and Trusts/Investments

Post by iZibSolutions »

Yes, verbatim his words. His opinion is that of the nursing homes in their area, the ones that accept Medicaid are the ones that he would choose based on care. But if we transfer assets to the trust, we could then use that money to supplement their accommodations. All of that with the understanding that our parents would be relying on our word to do that as it would legally be our money.

Again, there are currently no health concerns with them. And at the end of the day, we as a family are trying to do what is best for them. Neither my sister or I have any need for the money and it will most likely be passed on to our children as a gift from their grandparents if they don't use it.
delamer
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Re: Elder Parents and Trusts/Investments

Post by delamer »

dbr wrote: Mon Jun 27, 2022 12:26 pm
iZibSolutions wrote: Mon Jun 27, 2022 12:22 pm Yes they have an eldercare attorney, he is the one that set up the trust. He is also the one that is recommending transferring assets to the trust. His reasoning is that they do not have enough money to likely cover an extended nursing home stay on their own. By transferring assets, we could use the money to provide a private room, etc for them where medicaid would not.
Just to confirm with no pejorative comments, the recommendation of the elder care attorney is to divest assets so that one can qualify for Medicaid benefits and then upgrade the level of accomodation by having you cover the extra costs from the trust?
That’s my interpretation too.

Isn’t the point of such a trust to protect assets for heirs?
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bsteiner
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Re: Elder Parents and Trusts/Investments

Post by bsteiner »

Different states treat IRAs differently for Medicaid. Some states treat them as available. Other states treat your required distributions as income.

I would think that most people in their early 70s worth $1 million or so wouldn't want to give up flexibility and control to protect against nursing home expenses in the future (most likely the distant future), especially if they have pensions and Social Security, but some might.

There is, however, a significant tax cost to withdrawaing their entire IRA benefits now.
ncbill
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Re: Elder Parents and Trusts/Investments

Post by ncbill »

iZibSolutions wrote: Mon Jun 27, 2022 12:41 pm Yes, verbatim his words. His opinion is that of the nursing homes in their area, the ones that accept Medicaid are the ones that he would choose based on care. But if we transfer assets to the trust, we could then use that money to supplement their accommodations. All of that with the understanding that our parents would be relying on our word to do that as it would legally be our money.

Again, there are currently no health concerns with them. And at the end of the day, we as a family are trying to do what is best for them. Neither my sister or I have any need for the money and it will most likely be passed on to our children as a gift from their grandparents if they don't use it.
Of all the nursing homes I've been in locally only the ones attached to CCRCs offer private rooms...and you have no chance of getting into one of those unless coming from independent or assisted living within that particular CCRC.

Stand-alone nursing homes here ALL take Medicaid since they have no choice...nearly all of their residents are on it, but at best you get a semi-private room (or ward in some of the older ones) & since nearly all residents are on Medicaid care standards bias...downwards.

I'd rather save my pennies to die in a private room at an ALF any of which will ask about assets...if they deem those insufficient they'll require one or more of the kids to sign as financial guarantor before agreeing to admit...versus even spending a day in a SNF custodial bed.
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celia
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Re: Elder Parents and Trusts/Investments

Post by celia »

Why would your parents want to go to a (primarily) Medicaid home when they can likely use their SS and pensions for a private pay Assisted Living which would be nicer? After they are both in such a home, their house can be sold to fund any excess costs. And if they both need Assisted Living at the same time, they can share a room rather than being separated. (Of course, some couples want to be separated such as if one is a noisy snorer or is in constant pain, while the other needs to get a good night’s sleep.)

The growth in assets in the Medicaid trust will be taxed at higher rates than if they were in a Revocable Living trust (which is taxed the same as when they held things in their own names).
dbr
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Re: Elder Parents and Trusts/Investments

Post by dbr »

celia wrote: Mon Jun 27, 2022 3:38 pm Why would your parents want to go to a (primarily) Medicaid home when they can likely use their SS and pensions for a private pay Assisted Living which would be nicer? After they are both in such a home, their house can be sold to fund any excess costs. And if they both need Assisted Living at the same time, they can share a room rather than being separated. (Of course, some couples want to be separated such as if one is a noisy snorer or is in constant pain, while the other needs to get a good night’s sleep.)

The growth in assets in the Medicaid trust will be taxed at higher rates than if they were in a Revocable Living trust (which is taxed the same as when they held things in their own names).
Right, It seems to me the best choice would be planning to spend their income and their assets including the home rather than trying to unload assets and then somehow gain some Medicaid benefit with the idea of leaving more to the heirs. If assets altogether are on the order of $1M or so and there is another $100k in income (just guessing, but SS + pensions?) then this would seem to be straightforward. Has there been a serious investigation of available facilities in the area?

Also, it seems unclear to me how pension and SS income would come in under Medicare income limits, but maybe it does. The attorney presumably understands the local situation . . .
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Lee_WSP
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Re: Elder Parents and Trusts/Investments

Post by Lee_WSP »

They don't have access to a nicer facility which will take a down payment and then transition them to Medicaid?

It usually makes sense to put the house in trust because retaining the right to live there for life is a rather easy provision to craft and the house is illiquid so you can't easily switch from living in your home to an assisted living facility without Medicaid impact. However, the decision to put liquid assets into a Medicaid protection trust is a much harder and complicated decision.

Whether it's all worth the cost and tradeoffs is yet another question.
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iZibSolutions
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Re: Elder Parents and Trusts/Investments

Post by iZibSolutions »

Let me rephrase the entire question and statements.

We are not trying to evade Medicaid or planning to do anything with the money.
What they do want is for my sister and I to have full control over what happens to everything including the choice of how their care is paid for. They are 100% aware that once the money is in the trust, we have full control over it.
They have their own elder care attorney that has done all of the legal work and given them his recommendations.

What we are trying to ask here is this....

For their Traditional IRA's, is there any benefit to not transferring it to the Trust? In our opinion, it would be better to pay taxes now and only have capital gains taxes going forward. The thinking is that taxes are not going to go significantly down and their tax bracket (even taking it out over a two year period) would be significantly lower than either of ours.

If they take it out, aside from the obvious tax brackets, is there anything else to pay attention to as far as limits that would affect anything other than the MAGI limits for Medicare premiums?

For the Roth IRA's. It seems like the only benefit to putting this money in the Trust would be to protect it from Medicaid. But the tax implementations would be large. Is there anything we are missing here?

Thanks
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iZibSolutions
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Re: Elder Parents and Trusts/Investments

Post by iZibSolutions »

On a separate note, you all have us questioning looking more into nursing home facilities. Is this really something that should be done now? Again, aside from being in their early 70's, they are healthy. We assumed we would cross that bridge when/if the time came.
delamer
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Re: Elder Parents and Trusts/Investments

Post by delamer »

iZibSolutions wrote: Wed Jun 29, 2022 2:45 pm On a separate note, you all have us questioning looking more into nursing home facilities. Is this really something that should be done now? Again, aside from being in their early 70's, they are healthy. We assumed we would cross that bridge when/if the time came.
If your parents are considering moving into a Continuing Care Retirement Community, then you should start investigating them now.

A CCRC allows a couple to move into an independent residence, and then receive assisted living, memory care, or skilled nursing if/when their health requires it — all in the same facility (campus). As people age, it is not uncommon for one spouse to continue living in the independent residence while the other receives assisted living or nursing care.

If they are thinking just in terms of where they might end up if they need skilled nursing due to failing health, then that’s a bridge they’ll need to cross at that time. Although it is always good to listen to friends/neighbors and find out what the well-regarded local nursing facilities are.
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Re: Elder Parents and Trusts/Investments

Post by BarbK »

So basically, your parents want to protect their assets for their children who don't need it; yet have the US taxpayers fund their nursing home care.
And you somehow will upgrade the experience with their $ that was withdrawn before the 5 year lookback.

Have they even visited a Medicaid facility? vs a CCRC or an Independent/Assisted Living facility ? There is a HUGE difference.

My mom went the Independent/ALF route (6.5 years). We sold the house to pay for it. And as far as IRA $, by the time she was in the ALF, it was deductible for medical reasons so basically no taxes. When she died, there was still $ left over to pass to her heirs.
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Re: Elder Parents and Trusts/Investments

Post by SuzBanyan »

As BarbK referenced with respect to her mother, many people eventually have medical expenses such that some or all of the distributions from their IRA are tax free. So it is not a choice between paying taxes now at the parent’s rate v. paying taxes after death at the kid’s rates. It may be that some of the IRA may be tax free due to deductions for medical expenses.

And just to add that if your parents don’t want to pay taxes on their RMDs in the years before they have significant medical expenses and they are charitably inclined, they can make Qualified Charitable Donations. RMDs paid directly to charities after age 70.5 are not income to the IRA owner.
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Re: Elder Parents and Trusts/Investments

Post by delamer »

BarbK wrote: Wed Jun 29, 2022 3:31 pm So basically, your parents want to protect their assets for their children who don't need it; yet have the US taxpayers fund their nursing home care.
And you somehow will upgrade the experience with their $ that was withdrawn before the 5 year lookback.

Have they even visited a Medicaid facility? vs a CCRC or an Independent/Assisted Living facility ? There is a HUGE difference.

My mom went the Independent/ALF route (6.5 years). We sold the house to pay for it. And as far as IRA $, by the time she was in the ALF, it was deductible for medical reasons so basically no taxes. When she died, there was still $ left over to pass to her heirs.
People protect their assets for their heirs all time. And/or to reduce their heirs’ tax burden on their inheritance.

As long as they aren’t breaking the law, that’s their privilege.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Elder Parents and Trusts/Investments

Post by afan »

delamer wrote: Wed Jun 29, 2022 3:44 pm
As long as they aren’t breaking the law, that’s their privilege.
In fact, they seem to be trying to scrupulously follow the law.

One of the reasons to keep some money in traditional IRAs, rather than converting all to Roth, is the tax treatment of medical expenses. Elderly people can avoid taxation on that money entirely if their expenses are high enough. Healthy people the parents' age who are not so wealthy that they can easily self insure for long term care should be cautious about taking out too much. They could end up paying for more in taxes than they need to.

As for the QCD idea- it is a good way to save taxes for those in a position to make the gifts. A couple that is worried about affording long term care should not be making QCDs.
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Re: Elder Parents and Trusts/Investments

Post by ncbill »

iZibSolutions wrote: Wed Jun 29, 2022 2:43 pm Let me rephrase the entire question and statements.

We are not trying to evade Medicaid or planning to do anything with the money.
What they do want is for my sister and I to have full control over what happens to everything including the choice of how their care is paid for. They are 100% aware that once the money is in the trust, we have full control over it.
They have their own elder care attorney that has done all of the legal work and given them his recommendations.

What we are trying to ask here is this....

For their Traditional IRA's, is there any benefit to not transferring it to the Trust? In our opinion, it would be better to pay taxes now and only have capital gains taxes going forward. The thinking is that taxes are not going to go significantly down and their tax bracket (even taking it out over a two year period) would be significantly lower than either of ours.

If they take it out, aside from the obvious tax brackets, is there anything else to pay attention to as far as limits that would affect anything other than the MAGI limits for Medicare premiums?

For the Roth IRA's. It seems like the only benefit to putting this money in the Trust would be to protect it from Medicaid. But the tax implementations would be large. Is there anything we are missing here?

Thanks
Well, if they need to pay out-of-pocket for LTC then leaving the money in the traditional IRA would likely mean a larger amount of dollars available as afan notes above.

Versus pulling everything out over two years, paying the taxes (probably 22% federal, plus state which here would be a flat 4.99%) and depositing the rest into the trust.

It does start the 5 year clock running, though that applies individually to each year's distribution.

No 'tax implications' with the Roth IRAs...at their ages they can pull everything out tax-free, anytime, then move it into the trust & start the 5-year clock running on those funds...yes, I'm assuming 70+ year olds setup their Roth(s) more than 5 years ago.

The trust, of course, needs to pay out its annual income to the named beneficiaries & issue K-1s so the income is taxed at their lower rates.
Last edited by ncbill on Thu Jun 30, 2022 3:58 pm, edited 3 times in total.
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FreddieFIRE
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Re: Elder Parents and Trusts/Investments

Post by FreddieFIRE »

afan wrote: Wed Jun 29, 2022 6:07 pm A couple that is worried about affording long term care should not be making QCDs.
Probably not $100K per year, but it is a good way for folks of any means to support their favorite charities. Especially those who don't have itemized deductions in excess of the standard deduction.
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SuzBanyan
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Re: Elder Parents and Trusts/Investments

Post by SuzBanyan »

afan wrote: Wed Jun 29, 2022 6:07 pm
delamer wrote: Wed Jun 29, 2022 3:44 pm
As long as they aren’t breaking the law, that’s their privilege.
In fact, they seem to be trying to scrupulously follow the law.

One of the reasons to keep some money in traditional IRAs, rather than converting all to Roth, is the tax treatment of medical expenses. Elderly people can avoid taxation on that money entirely if their expenses are high enough. Healthy people the parents' age who are not so wealthy that they can easily self insure for long term care should be cautious about taking out too much. They could end up paying for more in taxes than they need to.

As for the QCD idea- it is a good way to save taxes for those in a position to make the gifts. A couple that is worried about affording long term care should not be making QCDs.
As your final point. The parents here are trying to use legal means to create a situation where they don’t have enough money for long term care.
And the OP’s parents have enough in pension and social security to fund their current expenses, so a QCD will not impact their current lifestyle. The roughly $8500 of RMDs on the $225,000 total in the are “excess” income for the parents.

The alternative the family is considering is distributing all of the IRA over 2 years and then gifting the balance net of current taxes to their children through an irrevocable trust.
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