When it comes to special government programs, what on the surface appears to be a good deal may not really be to your advantage or especially to your estate beneficiaries. Unfortunately, chances are that you are already invested in once these “deals.” That is unless you know all of the rules and you are logically planning for taxes on the money coming out as well as going in.
Below are three of the most commonly used programs where the government can get more than its money’s worth from your estate.
IRAs and 401ks
Throughout the working years, having IRAs and 401ks seems like a great boon to your income tax burdens. After all, you get a tax deduction for putting money away for retirement, the money grows without any current income or capital gains taxes, and you get to then take money out in retirement. The sometimes empty promise is that you will be taking the money out when income tax rates are lower because you are no longer working. Unfortunately, the really big savers I’ve seen end up in the same or higher tax brackets, and then their heirs get slammed with inherited income taxes afterward. Imagine leaving $1 million from an IRA to a child… which means about $100,000 or more in taxable income at a minimum over each of the next ten years that’s placed on top of the child’s own income taxes.
Unfortunately, this one is targeted at beneficiaries with special needs who have Medicaid as their health insurance. Parents of working adult children with special needs are well aware that their child is not allowed to “work too much” because the excess paycheck money could push them above certain limits that would then get them kicked off of Medicaid and possibly other programs. In comes the ABLE account where workers are now allowed to work more and put away more money in their ABLE account (currently up to $16,000 annually more), and it will not disqualify them from benefits. This money can only be used for certain qualifying expenses, and other people other than the worker can actually contribute money to the account. However, when the special needs beneficiary passes on, the money is subject to confiscation by the government to repay all of the money they spent on them. Does it sound like a good deal to work more, accumulate a few hundred thousand dollars for that hard work, and then give it all to the government when you pass on? Not to me.
Government Program – Medicaid for Nursing Home Care
Throughout your life, part of your taxes goes towards supporting the Medicaid system which is essentially government long-term care insurance. Under the rules, if you are at least 65 and need long-term care, you are allowed to keep certain assets and still qualify, including some liquid assets, a vehicle, and a home of a certain equity limit. What most people and their families don’t realize when trying to qualify is that Medicaid is allowed to confiscate all of those assets after you pass on in order to get its money back. Unless things are set up properly, everything the family thought was protected is taken away after you pass on.
In all of these cases, planning things the right way can take advantage of these programs on both the front and back end. Planning to not overfund tax-deferred accounts means lower taxes overall and not just year to year. Spending as much money from ABLE accounts as possible to increase the quality of life means a special needs beneficiary isn’t just working more to benefit the government. And properly planning assets at the start to qualify for Medicaid means also making sure the assets are passed to the right beneficiaries and not the government after you are gone.
To see the YouTube video on this topic, shot on location in St. Augustine, Florida, Click Here.