Case #4750 – From IRA’s to Long-Term Care

Written by Michael Baron on . Posted in Annuities, Long-Term Care

Bob and Beth Pettison came to me with a unique problem.

“We’ve been reading your columns on this long-term care policy with the life insurance benefit you can access for long-term care needs – if necessary. Most of what you’ve talked about is people having money in CD’s who can increase their long-term care coverage. We don’t have a lump sum of money sitting in CD’s but we do have some money in qualified acounts– IRA’s and SEP’s – that we realize we won’t need when we reach age 70. What can we do to get protection when all we have is untaxed money sitting there?” Beth asked.

In this case, if Bob and Beth took out all of their money at one time for a lump sum deposit in order to acquire supplemental or primary long-term care, they would have a huge tax bill to deal with.

However, we were able to talk to a company that specializes in qualified funds and tax-deferred funds that have untaxed interest earnings.

Bob and Beth were able to transfer their IRA’s and SEP’s to the same type of qualified plan with this company. They then set up a twenty pay option on the IRA directly into the long-term care coverage – buying them nearly the same amount as if they had put in a lump sum – or about twice the amount of money they had in their qualified accounts.

The difference in coverage was because of this. If Bob or Beth needed care prior to the twenty years being paid in, or died for that matter, the company would still have the remainder of the IRA’s and SEP’s to use for long-term care as well as the death benefits under the long-term care policy. While the IRA account was going down, the cash value was filling up on the long-term care policy.

If they went on claim, Bob and Beth could draw from both their remainder accounts with the IRA’s and also use the benefits created by the policy.

If they died, their children would receive a portion of their money from the IRA’s and pay tax upon it while the death benefit paid under the long-term care policy came to them tax-free.

Because the withdrawals were set up over a twenty-year period, Bob and Beth only had to pay income taxes on the annual withdrawals each year rather than the lump sum. As they were actively farming, they were able to mitigate these taxable withdrawals by controlling their farm income.

In their case, they were able to create long-term care benefits to supplement their inadequate coverage (they were only insured for $175/day and minimum costs are now over $200/day). They had a lump sum death benefit they could access if they needed to fill in either holes in their coverage or care costs not met by their smaller long-term care policy.

They were also able to move their funds from a taxable event for their children to a by and large non-taxable death benefit – depending on whether the twenty years had expired and the IRA’s had been exhausted. If not, then the children received the death benefit – less any long-term care costs for either Bob or Beth from the same policy.

This same method would be used for annuities with growth in them that has not been taxed. Again, the company can do withdrawals from ten to twenty years and my client only pays income tax on the interest withdrawals. Because of the annuitizing of the contract, the interest would be spread out over the years chosen by the clients.

Bob and Beth were thrilled. “We can use this retirement money for a much better purpose – to protect our farm, and to give us peace of mind if our long-term care insurance is inadequate in the future. We also have access to all of the premiums paid after ten years, so if we truly need money, we can get at it. It seems like the right solution for us.”

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Michael Baron is not an attorney. Information given through written, verbal, or electronic means by Michael Baron or Great Plains Diversified Services, Inc. is not to be construed as legal advice. An attorney, tax advisor, or other registered advisor is needed for the completion of the estate planning process. An attorney must be consulted for legal advice and the drafting of legal documents.