My husband has been in a long-term care facility for two years and in two months, Medicaid will start paying for his care. I've been told Medicaid will take his monthly pension, Social Security benefit and the required minimum distribution, known as RMD, from his 401(k). I'm the designated 401(k) beneficiary.
I've been advised to cash in the 401(k) in the next two months, paying the heavy taxes on it, because Medicaid will seize the account upon his death. Is that true, or is it protected since I am the beneficiary?
Under New York law, Medicaid has no claim on this account after his death.
During your husband's lifetime, the RMDs from his 401(k) account must be spent on his nursing home care; and after his death, Medicaid can assert a claim against his probate estate in order to recoup the benefits it spent for that care. But his 401(k) account isn't part of his probate estate.
Your probate estate consists of assets that are governed by your will. Retirement accounts with designated beneficiaries aren't probate assets. They pass to their beneficiaries regardless of what the account owner's will says. (Other readers take note: If you haven't named beneficiaries on your retirement accounts, the default beneficiary typically is your estate — and accounts paid to your estate become probate assets.)
If your husband cashes in the 401(k) during his lifetime, the account becomes subject to income taxes. In rare circumstances, cashing it in may make sense (for example, if he has a medical deduction big enough to offset the tax, and can transfer most of the proceeds to you), says Bernard A. Krooks a New York City elder law attorney. But in most cases it does not.
THE BOTTOM LINE Medicaid has no claim against a retirement account with a designated beneficiary after its owner's death.
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