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The “Name on the Check Rule”

Hi, I’m Stuart Otto, Sales Manager for Krause Financial Services. Today, we’re going to talk about what the “Name on the Check Rule” is and how it’s used in Medicaid planning.

If your client is married, about to move into a nursing home, and is also looking to become Medicaid eligible but they own an IRA, the “Name on the Check Rule” may be the best option for your client.

The “Name on the Check Rule” is a rule used by Medicaid agencies to determine income ownership.

When the institutionalized spouse owns an IRA, the amount in the IRA will count towards their total assets in regard to Medicaid eligibility. If they try to liquidize their IRA, they will receive a large tax consequence and they will still need to spend down that amount.

Using the “Name on the Check Rule” avoids a large tax on the money and helps eliminate the assets in the IRA. This way, the funds will only be taxed as payments made within the calendar year over the term of the annuity.

Let’s take Judy and John. They are both 81, and John is about to enter a nursing home. However, they need to spend down their total assets in order for John to be eligible for Medicaid benefits.

Together, John and Judy have $326,000 in total assets, which includes John’s IRA of $200,000. The maximum Community Spouse Resource Allowance is $126,420, so Judy is allowed the full amount, along with her house, personal belongings, and one vehicle.

The couple must spend-down the other $200,000 in assets. After talking with their attorney, they decide to use the “Name on the Check Rule” in order to avoid a large tax consequence if they liquidated the entire IRA.

John takes his $200,000 in his IRA and uses it to fund a Medicaid Compliant Annuity, or MCA, via 60-Day Rollover. The MCA is owned by John but the income from the MCA is made payable to Judy alone. The attorney suggests structuring the MCA using John’s full Medicaid life expectancy of 7.72 years or 92.64 months. The monthly payment from the MCA will be $2,225.

By purchasing the MCA, John’s IRA of $200,000 is spent down, and he becomes immediately eligible for Medicaid. Now that Judy will be receiving an additional income from the MCA, her monthly income will go up significantly. Judy’s original income of $1,500 from Social Security, adding in her MCA income of $2,225, she has a new monthly income of $3,725, which is above the maximum Monthly Maintenance Needs Allowance so she will not receive an income shift from John.

You will want to consider a few things while discussing this plan with your client. As shown in the previous example, you will want to utilize the full Medicaid life expectancy of your client. This is the more conservative approach and allows your client to utilize this strategy successfully and responsibly.

If Judy was able to receive an income shift from John because her monthly income and the annuity income together did not add up to the maximum Monthly Maintenance Needs Allowance, this strategy may not be necessary. Rather, the institutionalized spouse may remain payee of their tax-qualified annuity. Factoring in the current income of both spouses and the monthly shelter expenses of the community spouse are crucial in determining the viability of this option.

In some cases, the “Name on the Check Rule” may be questioned by the caseworker. In order to show that the income is the community spouse’s alone and not the institutionalized spouse’s, we recommend having your client receive a paper check each month from the company, rather than receiving a direct deposit. This way, if there is a question of whose income it is, your client will have physical evidence that the community spouse’s name is the only one on the check and therefore is only their income.

If your client has a small value in their IRA, it may make more sense to liquidate the funds and transfer the net proceeds to the community spouse. The tax consequences of liquidating the funds may be offset by medical expense deductions when filing that year’s taxes. We recommend consulting with a local tax expert or CPA to know if this is a viable option for your client.

This strategy has been successful in cases around the country, but a number of cases are still pending, so we suggest you contact us directly in order to receive the most up-to-date information. More and more states are accepting this strategy and only a few will incorrectly attribute the income to the [institutionalized] spouse.

If you’d like to learn more about your client’s options when working towards Medicaid eligibility, contact our office at 855-552-5893 to speak with a Benefits Planner.

I’m Stuart Otto, and thanks for watching.

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