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  1. #1
    Join Date
    Aug 2016
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    23

    Default How Should Debts of an Estate be Paid Out of Retirement Accounts

    My question involves estate proceedings in the state of: Florida

    My grandmother had been in a assisted care facility for a number of years. It wasn't cheap and eventually ate through an insurance fund she had set up to pay for such a thing. All she really had to her name was a condo and an IRA of around $150k. She is survived by 2 children.

    When the insurance money ran out they found they were able to shuffle some things around in a way she could obtain medicare assistance with paying the assisted living. This entailed putting one of the childrens name on the deed to the condo (the one had been living in it for several years already) and the IRA was set to be split between the two upon death. I am told this allowed it to be protected from debts upon execution of the will after death. This was able to drop my grandmothers assets possession low enough to get the medicare she needed.

    So recently with the death of the grandmother, the will will be processed. However there are 2 debts, one is a credit card with about 14k on it (known) and the other is an administration goof let the medicare laps for 3 months and there is a chance that about 12k $ will need to be paid as well. Clearly these need to be paid, but our question is HOW. The best way they want to do it is to use the money that is in the IRA. However the children are under the impression that if they do that, the money taken out will be considered income and thus 1) Taxed, and 2) effect social security checks as they are still working and an income of 25K is a pretty drastic offset from their current paychecks.

    So the question at hand, can the money from the IRAs be used by the IRA holders to pay off the debt without that money looking like income?

    They will be getting a hold of a lawyer at some point (the death certificate still has not been signed.. you would think florida would have a fast lane for this kind of stuff by now) but I am hoping to alleviate some of their fears early if I can.

  2. #2
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Deceased Mother Has Some Debt, As Well As IRA Passed Down. Use IRA W/O Tax Penalt

    Quote Quoting seki
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    So the question at hand, can the money from the IRAs be used by the IRA holders to pay off the debt without that money looking like income?
    Assuming these are traditional (i.e. not Roth) IRAs then the answer is no. The distribution from the IRA is taxable income to the owner of the IRA when distributed. As the IRA is an inherited IRA, however, there would be no 10% early withdrawal tax (what most people refer to as the early withdrawal penalty) even if the beneficiaries are not yet age 59.

  3. #3
    Join Date
    Jan 2011
    Posts
    401

    Default Re: Deceased Mother Has Some Debt, As Well As IRA Passed Down. Use IRA W/O Tax Penalt

    I thought that IRA's passed outside of probate and the beneficiaries of an IRA are not on the hook to pay estate debts out of the proceeds?

  4. #4
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Deceased Mother Has Some Debt, As Well As IRA Passed Down. Use IRA W/O Tax Penalt

    Quote Quoting bcr229
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    I thought that IRA's passed outside of probate and the beneficiaries of an IRA are not on the hook to pay estate debts out of the proceeds?
    That depends on how the IRAs were held and the applicable state law. It is possible that the estate creditors could not reach the IRA funds. But in any event, if the owners take a distribution from the IRAs to pay the debt they will trigger taxable income, assuming they are traditional IRAs.

  5. #5
    Join Date
    Mar 2013
    Posts
    18,340

    Default Re: Deceased Mother Has Some Debt, As Well As IRA Passed Down. Use IRA W/O Tax Penalt

    Quote Quoting bcr229
    View Post
    I thought that IRA's passed outside of probate and the beneficiaries of an IRA are not on the hook to pay estate debts out of the proceeds?
    Taxing Matters will clarify this if I am a little fuzzy about it but it appears that Florida statute 222.21 exempts traditional IRAs from creditors and specifically applies to inherited IRAs.

    http://www.leg.state.fl.us/Statutes/...s/0222.21.html

    Before anybody touches the IRA you should study IRS Publication 590-B Page 5 on inherited IRAs:

    https://www.irs.gov/pub/irs-pdf/p590b.pdf

    Additional information on inherited IRAs from the IRS:

    https://www.irs.gov/retirement-plans...cs-beneficiary

    https://www.irs.gov/retirement-plans...-beneficiaries

    This entailed putting one of the childrens name on the deed to the condo
    The condo might also be safe from creditors depending on how the name was added. If it was written Granny and ______, as joint tenants with right of survivorship, then it's possible that it became owned by _________ at the moment of Granny's death and was no longer part of her estate.

    The deceased's debts have to be paid to the extent that the estate has assets to pay them. No assets, no pay.

    However, there could be hidden issues that might change that so you'll want an attorney to thoroughly review everything before making any financial decisions.

  6. #6
    Join Date
    Aug 2016
    Posts
    23

    Default Re: Deceased Mother Has Some Debt, As Well As IRA Passed Down. Use IRA W/O Tax Penalt

    Thanks for all the replies.. kinda forgot about the thread after the first few replies.

    Adjuster, the condo WAS completely changed over to the sisters ownership in a way that it could not be considered her asset anymore (required for medicare) and thus out of creditor reach. I'll take a look at the irs documents, the sister who lives close still hasnt gotten a hold of a lawyer yet even though we constantly nag her. ::rolls eyes::

  7. #7
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: How Should Debts of an Estate be Paid Out of Retirement Accounts

    If the IRA has beneficiaries then that money passes outside of the estate and belongs directly to them (they need to roll it over into IRAs of their own to avoid tax). Therefore it is not available to pay estate debts.

    The home passes outside of the estate as well so it is not available to pay estate debts. If she has no other assets that would go into the estate then there is no reason that either of her children have to open probate...and the creditors would be sol.

    They can certainly choose to pay the debts if they want to, but I would recommend that they find some way to do it other than cashing in retirement money, because yes, that would be taxable income to them.

  8. #8
    Join Date
    Jun 2011
    Posts
    157

    Default Re: How Should Debts of an Estate be Paid Out of Retirement Accounts

    It sounds to me like she had Medicaid, NOT Medicare.

    Medicare will not pay for assisted living, only a nursing facility, and only very short term stays at that. There are also no asset/resource requirements to receive Medicare.

    I'm really surprised she was even able to get Medicaid, given the transfers of her resources. Moving money or property to someone else's name for Medicaid eligibility purposes is rarely allowable.

    Furthermore, there's something called Medicaid estate recovery, where any assets remaining at the time of death of someone who is either 60 or older or permanently institutionalized, are claimed by the state as repayment for Medicaid.

    I think OP REALLY needs to get advice from an attorney before proceeding to do anything with the assets.

  9. #9
    Join Date
    Jan 2006
    Posts
    38,867

    Default Re: How Should Debts of an Estate be Paid Out of Retirement Accounts

    I believe there is a look back period as well (5 years maybe) where transfers during that time are reversible to allow Medicaid to obtain payment.

  10. #10
    Join Date
    Jun 2011
    Posts
    157

    Default Re: How Should Debts of an Estate be Paid Out of Retirement Accounts

    Yes, there is a 5 year look back period to review for any improper transfers of assets. Any improper transfers will make the applicant ineligible for long term care Medicaid for a period of time.

    It's not as simple as just transferring title of a house to become eligible for Medicaid.

    I'm wondering if the Medicaid caseworker was not informed of the transfer and didn't happen to catch it.

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