Dear Michael:

We read with interest about your column some time back about how we can use some of our retirement funds to provide for long-term care in the future, but can't seem to find the exact article. Can you reprint or explain again how this would work? We have a significant amount in retirement funds, but really don't need the income from it. We will likely take the Required Minimum Distributions and leave it to our non-farming kids while our son gets the farm. – IRA Confounded.


Dear Confounded:

It's a funny thing about IRA's and other qualified money.

If you have a large amount in qualified money, typically it's because you had a rather successful life and later on in life during retirement, you really don't need the money because you have farm rental and other income.

For people with smaller IRA amounts, the amount isn't large enough to change their standard of living so, they too, only take out the minimum required or RMD.

In almost all cases, over time, most people only take their RMD's and leave the rest to their children from their IRA – the savings that was supposed to be the defining retirement tool when introduced. Not many people actually use their savings in qualified money to supplement their retirement income on an on-going basis – as was intended by Congress when it first approved them.

Many, many farm families, such as yourselves, want this money to go to the non-farming children in lieu of farm property to the farming child. However, even if they got every penny in your retirement account, they'd still have to pay income taxes on their inheritance whereas the farming child does not.

Second, this is money that cannot be protected by long-term care. Being as it is an ëindividual retirement account', if this individual requires care, these funds will be used to pay for care if there isn't sufficient income to provide care. And, there goes the non-farming children's inheritance. To protect it, you'd have to withdraw it, pay the taxes upon the entire amount and then gift it away.

Because of this, many people are considering how to remove income taxation and protection from long-term care for their non-farming children.

One company I am aware of allows you to transfer your qualified money – or a portion of it – to them. They will then make systematic withdrawals from your account each year for twenty years. They will also pay you interest on both the amount not withdrawn yet and the amount growing in the next account.

A person would have to pay income tax on these systematic withdrawals over twenty years, but sooner or later someone is going to have to pay taxes on these funds in any case.
The company then takes these withdrawals and provides a life insurance/long-term care benefit from the payments received. As you might know, a death benefit from life insurance is not taxable to your heirs versus your qualified money. This death benefit is anywhere from one and a half times to three or four times your deposit amount– depending on age.

This contract also allows you to access your death benefit early in the event of ëchronic health care' issues. The contract will pay out the death benefit for chronic care issues – which typically means long-term care costs.

For example, you can put in one hundred thousand dollars of qualified money. In turn, the contract would give you, for example only, two hundred and twelve thousand dollars in death benefit. You would pay income taxes on the $5,800 annual withdrawal over twenty years each year as it is transferred.

If you needed care, you would receive two percent per month of the death benefit or $4,240 per month for care needed – long-term, home care, assisted living, adult day care, etc. If you died prior to receiving all of your death benefits early, your children would receive the death benefit less any claims paid. If no claims were paid, the children would receive the entire two hundred twelve thousand tax free – much more than the one hundred thousand taxable.

Last, but not least, you can make this a joint policy – covering both you and your spouse. Now your qualified money can do double duty. You can also add on a lifetime rider for a nominal amount stating that even if you use up all of your death benefit and are still receiving care, the contract continues to pay as long as you live.

For people with qualified money who have no intent to use this money other than to leave to their children but don't have long-term care covered, this may be the perfect solution.

Michael Baron is the owner of Great Plains Diversified Services, Inc. and is a regular contributor to the "Farm And Livestock Directory". Involved in farm estate planning for more than thirty years, Michael Baron is well-versed in farm income taxation, estate taxation, retirement planning, transition planning, oil and gas estate issues, and all other issues facing the family farm, including family dynamics.  Presented in a comprehensive, down-to-earth 'question and answer" format, the topics addressed in this column talk about the many aspects of estate planning – and how to 'Keep the Family Farm in the Family'.   Contact Michael Baron at [email protected].