Retirement plans, such as Individual
Retirement Accounts (“IRA’s”), are special assets not only when it comes to their
favorable income taxation treatment, but also when dealing with SSI and
Medi-Cal rules regarding eligibility and estate recovery.  Let us examine the rules, first, and then
consider a scenario.

            Retirement plans are “income tax
shelters”.  Except for Roth IRA’s,
retirement plans are funded with pre-tax earned income by way of an income tax
deduction for the contributions. Income earned inside the retirement plan accumulates
tax free until distributed out either to the participant or to his death
beneficiary.  Distributions are then
taxed as ordinary income in the year received.

            Tax deferral may not continue
indefinitely.  The plan must be distributed
gradually once a participant reaches 70 ½ through annual “Required Minimum
Distributions” (“RMD’s”) over the participant’s life expectancy, or, with a
married couple where the participant’s spouse is the sole beneficiary, over their joint life expectancy.  A beneficiary who inherits a deceased
participant’s retirement plan may also use his own life expectancy to compute
his or her RMD’s, but must commence RMD’s the year after the death; unless the
beneficiary is married to the decedent, in which case he or she can wait till age
70 ½. 

            A participant’s own retirement plans
do not count against the resource (asset) limitation for Medi-Cal eligibility
provided that the plan makes sufficient annual distributions, similar to RMD’s.  But the income does count towards the
Medi-Cal share of cost.  After the
participant dies, the plan is also exempt from subsequent Medi-Cal estate
recovery.  This is remarkable; assets
that are exempt for Medi-Cal eligibility purposes are normally subject to
estate recovery.

            But for SSI eligibility purposes an
IRA is not an exempt asset.  It counts
both towards SSI resource and income limitations, and is subject to estate
recovery.  So how can someone on SSI who
inherits a retirement plan maintain SSI eligibility, and SSI-linked Medi-Cal
eligibility, and the favorable income tax deferral discussed above?  

I recently assisted a client with this problem.  He received SSI/Medi-Cal and was named as a
beneficiary on his deceased mother’s IRA.
If he received his IRA directly as beneficiary he would lose these benefits.
He would have to withdraw all of his
inherited IRA at once and spend it down in order to regain his SSI and Medi-Cal
eligibility.  That would have triggered
immediate income taxation of all IRA distributions in the year received. 

Instead, we helped the beneficiary’s father to establish a
“Special Needs Trust” (“SNT”) and the beneficiary to assign his inherited IRA
to the SNT, with court approval.  The
order was necessary to confirm the assignment and satisfy the IRA plan
administrator.  An inherited IRA account was
then established in the name of the trustee of the SNT and the problem was

Now, the SNT receives the beneficiary’s RMD’s and the
beneficiary retains his SSI and Medi-Cal eligibility.  The SNT pays income tax each year on the
RMD’s which are reported by and taxed to the beneficiary.  The trustee uses the IRA to supplement the government
benefits by purchasing the comforts of life that are otherwise not met by his government

The foregoing approach worked because the beneficiary’s
father was able and willing to participate and because the beneficiary had the
capacity to assign his retirement plan.
Not every person who receives SSI and/or Medi-Cal is in that same
situation.  Different approaches may,
therefore, be required depending on the circumstances.  It may, for example, be necessary to utilize
a conservatorship in order to establish the special needs trust and to assign
the inherited IRA over to the trust.
That would be a more involved affair and whether it was worthwhile
proceeding would also require consideration of the various costs and benefits.










“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”