Funding a Medicaid Compliant Annuity (MCA) with a tax-qualified or IRA account can help your clients minimize tax consequences by spreading out the taxable income over several tax years as opposed to simply liquidating the account and paying all of the taxes in one year. Instead of instructing your client to simply liquidate the account and purchase a non-qualified/post-tax dollar annuity, we can fund the MCA with an IRA or other qualified account – i.e. 401(K), 403(b), defined contribution plans, etc. By funding the MCA with a qualified account and structuring the annuity period certain/term over a timeframe that spans over more than one tax year, tax consequences will be minimized. For example, if a MCA is established in January 2019 and the annuity payout period is structured for 2 years with the first payment starting in February 2019, we’re able to spread out the tax consequences over 3 tax years – client will receive payments from the annuity in 2019, 2020, and 2021.
By following a few guidelines, outlined below, you can help your clients establish Medicaid eligibility while also minimizing income tax consequences.
The IRA owner has two options: (1) a direct transfer or (2) a 60-day rollover.
Direct Transfer: The direct transfer consists of a direct plan-administrator to plan-administrator transfer. The insurance company issuing the MCA will obtain the funds directly from the company holding the IRA. When completing the MCA application documents, an additional Authorization to Transfer Funds Form is completed and signed by the client so that the MCA Company is able to obtain the funds directly from the current company. To avoid delays, it is usually helpful for the IRA owner to contact the current custodian periodically and urge them to transfer the funds immediately. The IRS does not limit the number of times an individual can “transfer” his or her IRA.
60-Day Rollover: The 60-day rollover takes place when the owner requests a liquidation of his or her IRA without withholding taxes and takes control of the actual funds. Within 60 days of receipt the owner needs to fund the new annuity contract. The IRS does limit the number of times an individual can “rollover” his or her IRA to once each fiscal year.
Therefore, if the IRA owner has multiple accounts, a direct transfer will be required.
2. Pay Attention to IRA Ownership and Characteristics
In order to avoid tax consequences, the ownership of the new annuity must match the ownership of the original IRA. We cannot change ownership of an IRA owned by one spouse to the other spouse without incurring immediate tax consequences.
This makes the transaction fairly easy if the community spouse owns the IRA, in that in most cases the community spouse purchases the MCA. If, on the other hand, the institutionalized spouse owns the IRA, we may consider using Name on the Check Rule or In Marriage QDRO.