Spousal Consent, Long-Term Care, and Protection of Retirement Assets

A rather specific question was posed to me in the comments of another post, so I’ll address it here. The question posed was:

“If a 62 year old widow remarries, and designates his emancipated children as beneficiaries of his 401(k), does he need his new wife’s endorsement to make the beneficiary designations stick? Also, are his retirement assets now at risk if his new spouse needs long term care?”

This is a great question, and since it appears to be a real world scenario playing out as we speak, I’ll issue the general disclaimer that this blog isn’t specific legal advice. Nevertheless, allow me to write generally on the topic.

Spousal Consent:

The basic answer is that spousal consent is required to change beneficiary designations on a 401(k), however, there is a loophole that allows a worker to avoid obtaining such consent. Section 417(a)(2) of the Internal Revenue Code requires spousal consent to designate new beneficiaries of 401(k) plans. However, spousal consent is not required to roll a 401(k) into an Individual Retirement Account (IRA). Furthermore, spousal consent is not required to change the beneficiary designation of an IRA, thereby creating a loophole to the original requirement of 417(a)(2).

I would be remiss if I failed to mention that there are clear ethical implications of this strategy in certain scenarios. In fact, the National Women’s Law Center advocates for a legislative closing of this loophole. Pay special attention to footnote 9.

Protection from Long-Term Care Expenses:

This basic answer to this portion of the question is that the retirement assets are not protected. The more complex answer is that they may be partially protected. When an individual enters a nursing home, they must privately pay for their care, until their assets and income fall below certain thresholds, whereupon they will qualify for Medicaid (called MassHealth here in Massachusetts), who picks up the tab. Many complex formulas determine the threshold for income and assets, and I’ll try to explain them briefly.

Countable assets (typically everything except for the house and car) of both spouses, including retirement assets, are tallied. MassHealth then allocates them among the community spouse and the institutionalized spouse (in the nursing home). The community spouse is allowed to retain a certain amount called the Community Spouse Resource Allowance (CSRA). The maximum CSRA is revised each year, and is currently around $110,000. Amounts in excess of the CSRA must be spent down to below $2,000 in order for the institutionalized spouse to qualify for MassHealth.

It is sometimes possible to increase the CSRA. First, we must determine if the combined income of both spouses (including income generated by the CSRA) is below the Minimum Monthly Maintenance Needs Allowance (MMMNA), currently set at around $1,800 (and itself subject to modification by more complex formulas). If their income is lower, then we can increase the CSRA, so that it will generate increased income up to the MMMNA. If their income is above the MMMNA, then we can file an appeal with MassHealth and argue specific reasons why the CSRA should be increased (typically based on the medical expenses of the community spouse).

Of course there are other strategies for protecting assets from long-term care expenses, and the best approach is to contact an estate planning attorney before it becomes an issue. Stay tuned for later posts on these important topics.

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