Challenges, Medicaid IRMAA, & False Shortcuts

It isn’t a hurricane, tropical storm, or an old name that is making a resurgence. IRMAA is an abbreviation for Income-Related Monthly Adjustment Amount. It may land as a significant surprise for anyone who is in retirement. Think about the person who is retiring and is getting Social Security. But what happens if you are fortunate enough to have a lot of retirement income? The issue is that you have more money to spend and live, but you also have a higher tax burden. 

IRMAA applies to people whose income is over a certain amount. The IRS goes back to your retirement income from two years ago. If you file in 2023, the IRS examines the taxes you paid in 2021. Why is this important? Because that amount determines what your Medicare insurance premiums are going to be. The result is that Medicare insurance isn’t the relatively low amount you thought it would be—and this is a monthly expense. You could go from paying $80 a month to $250. It’s a possibility that you could pay more in Medicare premiums than for health insurance when you were working. 

As people get older, many are looking for or expecting tax breaks. For example, we get taxed twice for Social Security. Once when it goes in and once when we receive it. The key is to begin planning for it now with the proper professionals, which will likely involve a financial planner and an elder law attorney. 

Now, Let’s Talk About Planning 

With that in mind, remember, when it comes to planning, many things are exactly what they say they are. When people face increasing Medicare premiums or realize they don’t qualify for Medicaid, they may take action. Depending on who they are talking to and getting advice from, they may begin to resolve the issue. Don’t make the problem worse. 

For example, because we work closely with trusts, it is essential to say that an irrevocable trust is precisely that. (There are also revocable trusts, which we recommend for 99% of our clients.) Why do we not tell most people to make an irrevocable trust? Once you set up an irrevocable trust, you can’t take it back. It’s permanent. In other words, you are giving up access, ownership, and to some extent, control. Many people opt to create them because they are ideal for asset protection. They cannot come after the assets inside the irrevocable trust if you get sued. 

The most common context—and is why we are bringing it up in this blog—is that irrevocable trusts can help you get government benefits to help pay for your health care as you age. People are led to believe that the only way they can get those benefits is if they don’t have any assets, or if they have them, they spend them down to nothing. The other common workaround is to put all your assets in an irrevocable trust to qualify for Medicaid. 

Don’t Look for Shortcuts

When you create an irrevocable trust, you are giving up ownership. Don’t rely on a “workaround.” For example, people may put their homes in irrevocable trusts and make their children the trustees. The assumption is that the kids will do whatever the parents want. They may, but the children have control. If they don’t, you are left without any form of recourse. You can’t take it back. And you don’t get immediate protection! You have to wait 5 years, which will likely increase to 7 to 10 years. There’s a look-back period after you create one. Essentially, you are going to pay a penalty for giving up ownership. 

Why do we advise only some people to create irrevocable trusts? Because you do not have to give up access, ownership, and control to receive government benefits. Certain assets are already protected when it comes to getting government benefits. For example, you don’t have to sell your home and spend your money to get a veteran benefit or Medicaid benefits if you are in a nursing home. 

Speak with J. Kevin Tharpe 
If you attend a webinar or a seminar and the moderator talks about irrevocable trusts in the context of government benefits, ask what the adverse effects are—to which there are several. If you have additional questions about qualifying for government benefits, trusts, or elder law, contact J. Kevin Tharpe, P.C., to schedule your consultation.

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Kevin Tharpe

With 25 years of experience, Kevin understands how estate planning, special needs planning, and government benefits programs work together. This is a crucial element of a thorough plan. He explains your eligibility for benefits programs and ensures that you do not make costly mistakes that may disqualify you or deplete your assets.

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