In this scenario, the placement of the retirement assets into the trust would be a “lump sum distribution” to the trust, meaning that the full value of the assets transferred would be taxed all at once – as ordinary income to the trust at the trust tax rate.
For example, for the tax year ending December 31, 2012, trust income over ,650 will be taxed at a rate of 35%.
This would convert the IRA from a lump-sum countable resource into a countable income stream only.
For the institutionalized spouse, the task is not as easily accomplished.
And, if you deducted your contributions to the account, you'll owe tax on the entire balance of the withdrawal. If you withdraw from your account before you reach 59 1/2, you'll likely incur a penalty of 10% of the amount of the withdrawal, in addition to the taxes you owe.
The exceptions for which you avoid this penalty include using the withdrawal to pay for qualifying medical expenses, college tuition, and up to ,000 toward the purchase of a first home for yourself, your child, or your parents. To find your RMD, you divide your account balance at the end of the previous year, which is typically Dec.
In preplanning, the tax-qualified funds cannot simply be transferred into a trust, and in crisis Medicaid planning the funds cannot simply be co-mingled with other post-tax countable resources in spend-down strategies.
For example, a lay trustee, who fails to consult with an attorney or other tax professional, could conceivably liquidate the entire retirement account in order to place all of the assets into the trust at one time, believing that this was required by the beneficiary designation.
As to crisis Medicaid planning, in some states retirement assets are simply exempt – usually only for the community spouse but occasionally for the institutionalized spouse as well.
In other states, these assets must be spent-down before eligibility can be established.
These assets are typically “qualified,” meaning that the money is deposited into these retirement accounts on a pre-tax basis, with the income taxes being collected upon withdrawal.
By now, most people know not to place qualified retirement assets into revocable living trusts.