By KARL KIM, CFP, CLTC
A critical part of protecting your assets in a healthcare crisis is making sure that the beneficiaries on your retirement accounts are correctly designated.
Because you don’t know when or if a healthcare crisis will happen, it is vital that the beneficiaries on your retirement accounts like IRAs, ROTH IRAs, 403(b), 401(k), 457 deferred compensation and SEPs be reviewed immediately.
If you wait, you may become incapacitated and legally unable to make any changes. This could be a very costly mistake for you and your family.
Here’s the history behind this. Nationally, only about 13% of people have purchased long-term care insurance.
If care in a long-term care facility is needed, the options for middle-class Californians are either to spend down their assets paying for care ++or++ qualify for long-term care Medi-Cal.
For Medi-Cal qualification, retirement accounts do not count as an asset if a periodic income is being taken from the account. Spousal retirement accounts do not count at all regardless of whether a periodic income is being taken or not.
Qualifying for benefits is only half of the story. In California, think of Medi-Cal as a loan program. Medi-Cal will help to pay for nursing home costs while someone is alive, but after they pass away, Medi-Cal wants their money back.
This is called recovery. Though they didn’t count for Medi-Cal approval, retirement accounts can be recovered against if the following occur.
- If you have no beneficiary designations on your accounts, then your account is paid to your “estate” at death and is subject to recovery by the Medi-Cal.
- If your beneficiary designation is your living trust, it is also subject to recovery by Medi-Cal.
So how do you avoid recovery against your retirement accounts? The answer is to make sure that your beneficiaries are people.
For example, your spouse could be your primary beneficiary and your adult children could be your contingent beneficiaries.
Designating beneficiaries is not a problem if the account owner is competent and can sign the retirement account application.
The problem that is arising today is if the retirement account owner is incapacitated and the beneficiaries on the retirement account need to be made or changed.
When this situation arises, the retirement account custodian (company) will ask for a copy of the Durable Power of Attorney (DPOA) to verify who the “attorney in fact” is. This is the person that has the power to manage your financial affairs.
Up until recently, the attorney in fact was allowed by most custodians to designate or change beneficiaries.
However, custodians are now reviewing the Durable Power of Attorney more closely to see if the attorney in fact has the “power” to designate or change beneficiaries.
If the custodian determines that the attorney in fact does not have the power to designate or change beneficiaries, then upon death the retirement accounts may be subject to recovery if paid to the “estate of” or a living trust.
To make sure that doesn’t happen to you, make sure that your Durable Power of Attorney allows for your attorney in fact to be able to designate or change beneficiaries on your retirement accounts.
If your Durable Power of Attorney does not allow for this, then you will need to find an attorney knowledgeable in Medi-Cal planning to amend this document.
Another option is to transfer your retirement accounts right now to the financial planning firm that you will use to file your Medi-Cal application if a long-term care crisis were to occur.
Getting the retirement accounts set up ahead of time avoids having to use the Durable Power of Attorney. The DPOA is not needed if the account owner is able to sign. This should be done right away as you don’t know when a healthcare crisis will happen.
These simple steps to be done now can save your spouse and family hundreds of thousands of dollars and unnecessary heartache.
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Karl Kim, CFP, CLTC is California’s premier retirement planning specialist. He is the author of “Don’t Go Broke Paying The Nursing Home: How Californians Can Protect Their Home, Cash and Retirement Accounts.” His office is located in La Mirada. He can be reached at (714) 994-0599 or at www.ReverseRetirementPlanning.com. He has submitted over 1,000 Medi-Cal applications over the past 20 years with a 99.9% success rate. Karl Kim is a registered principal and investment advisor representative with Triad Advisors, Inc. (member FINRA/SIPC, CA Lic #0810324). This is meant to be an educational article. This article is not meant to provide legal, tax, accounting or financial advice or other professional services. Do not make any decisions solely on the information in this article. Consult your tax advisor, financial advisor or attorney before taking any action. We are not responsible for any inaccuracies or misinformation.