Newsletter: August 2009

August 15, 2009

In this issue: Long Term Care and Medicaid Planning, Claiming Dependents for Income Tax Purposes.

Long Term Care And Medicaid Planning

Medicaid planning with qualified retirement accounts.

A person seeking Medicaid eligibility must meet the applicable resource requirements to qualify for benefits. Retirement accounts are treated as a resource if the individual has an ownership interest in the account and has the legal ability to convert it to cash. The countable amount of the retirement account will be reduced by the amount of any penalty incurred by the conversion of the account to cash; however, the countable amount may not be further reduced by the amount of any income tax incurred by the individual as a result of the conversion. Therefore, in efforts to obtain Medicaid benefits, your client may be hit with large penalty charges and unnecessary income tax liability if they do not undertake proper Medicaid planning.

Medicaid will permit an individual to annuitize a retirement account and will not count such annuitization as an improper transfer. Annuitization is the conversion of a sum of money into a stream of regular income payments that are guaranteed for a fixed period of time. For Medicaid purposes, the annuity must be irrevocable, nonassignable, actuarially sound, and provide for payments in equal amounts during the term of the annuity with no deferral and no balloon payments. These rules are extremely complex. We strongly recommend that the client consult with an attorney who primarily concentrates in the area of long-term care planning prior to annuitizing a retirement account.

Annuitizing an annuity can be to your client’s detriment.

Annuities can be a powerful Medicaid planning tool because annuitizing an annuity will result in the conversion of a countable resource into a noncountable resource. As a result of this impact, Medicaid has very strict rules with respect to the treatment and timing of the purchase of an annuitized annuity.

An annuity that was annuitized on or after February 8, 2006 will be deemed an improper transfer unless certain requirements are met (such requirements are too detailed and extensive to discuss herein). A single individual may properly annuitize an annuity before or after their permanent placement in a nursing facility without creating an improper transfer of assets. However, a spouse of an individual in a nursing facility can only annuitize an annuity before the individual’s permanent placement in a nursing facility without creating an improper transfer. An annuitization of an annuity by the spouse after the individual’s institutionalization will cause an improper transfer of assets. Annuitization of an annuity by the improper individual at the improper time could create a significant penalty period for your client and subject them to additional nursing home costs and liability.

You should always suggest that the client consult with a reputable attorney who specializes in long-term care planning prior to annuitizing an annuity.
 

Income Tax Deductions

Claiming a parent as a dependent for income tax purposes.

A child may be able to claim a personal exemption for their parent as well as a deduction for their parent’s medical expenses and long-term care services. A child may claim a personal exemption for any dependent they support that meets the requirements for a qualifying relative. A qualifying relative includes, but is not limited to, a parent, father-in-law or mother-in-law. The child will be able to claim the exemption so long as the child contributes more than 50% of the parent’s total support for the year and the parent’s income for 2009 does not exceed $3,650.00.

An individual may deduct the expenses paid for the medical care of the individual, their spouse or a dependent to the extent that the expenses exceed 7.5% of the individual’s adjusted gross income. If an individual’s parent meets the dependency test as discussed above, the individual can use any medical expenses that they paid for their parent toward this itemized deduction.
 

Please contact Smith and Condeni for more information. We look forward to hearing from you.