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Beyond Benefits

A look at a key retirement planning issue: estate planning.

Federal benefits counseling, financial planning and estate planning are all important elements of preparing for retirement, but they require separate and distinct areas of expertise. This week, we're going to tackle the last of them, so I've called in some expert help.

It was actually a question from a reader, Stan, in response to last week's column on annuities that prompted me to take up the estate planning issue. Here's what he asked:

Everybody is subject to the same rules if they end up having to be placed in a rest home for whatever reason. As an individual, you are allowed only limited personal wealth before Medicaid picks up the tab. Does an annuity count against any of this, particularly if you also are providing for a wife, kids, life partner or the family pet? Should a person elect to have this entire amount put into an irrevocable trust?

This is a common concern. Suppose Stan has income from a Thrift Savings Plan annuity, as well as a Federal Employees Retirement System or Civil Service Retirement System annuity, insurance policies, other tangible assets and even Social Security payments. He might not qualify for Medicaid assistance for nursing home care unless those assets are spent first.

Many people seek to protect their assets from being held against them in these kinds of situations by sheltering them in trusts or by giving them to family members. But there are several issues to weigh when considering such a course of action.

I went to my friend and associate Marc Levine of the law firm Handler & Levine for help in thinking through these issues. Marc's firm focuses its practice on estate planning, probate, trust administration and business law.

Marc defines estate planning as preserving and organizing your assets in a way that transfers the most value to your heirs with the least bureaucracy, taxes and interference. That, he notes, is not necessarily the same thing as purely planning to qualify for Medicaid assistance by making sure as little as possible of your assets will be counted as part of your estate.

I asked Marc what income would be included in the spend down for Medicaid. He said each state sets its own guidelines. In the District of Columbia, for example, the funds in retirement accounts -- such as the TSP, an Individual Retirement Account or a 401(k) - are not included as part of your assets in determining eligibility. But the District is in the minority. Most states do count such assets. The income derived from your retirement accounts is always counted as income for Medicaid purposes, but the extent to which the amount that remains in those accounts counts against you in terms of qualifying for Medicaid varies from state to state.

Marc said sometimes you have to make an initial decision of whether you are planning to preserve your estate for your heirs when you die, or to impoverish yourself while you are alive to qualify for assistance. Obviously, you would hope to impoverish yourself in a way that passes assets to your heirs. He noted there are firms that specialize in this area and recommended Elder Law Answers and the National Academy of Elder Law Attorneys as resources.

Marc also noted that he encourages most federal employees not to address this issue prior to retirement, other than by considering the purchase of long-term care insurance. Most people do not want to give their assets to the children before they even retire.

I asked if the type of TSP withdrawal option a retiree chose would have an impact on estate planning issues. Marc said that setting the Medicaid issue aside, TSP withdrawals used to matter a lot, because nonspouse beneficiaries had limited options. But recent changes in law make it possible for such beneficiaries to take a payout of TSP benefits immediately with some or no tax withholding, or make a plan-to-plan transfer from the TSP to an IRA set up at a financial institution.

I also called on another friend and associate, Joe Sullender, a certified financial planner and vice president of investments at the Financial Strategies Group of Wells Fargo Advisors, to weigh in on estate planning issues. With respect to long-term care, Joe pointed out the two basic options -- long-term care insurance or self insurance -- and noted the former protects your assets for your heirs and allows for flexibility of choosing where you want to receive care.

Joe further said he recommends to his clients that they spend their TSP money last in retirement. There are no tax consequences when withdrawing money from a savings account, and CDs and mutual funds have minimal tax liability as well. (Mutual funds are subject to capital gains taxes, but these taxes are only 15 percent of the gain.) Withdrawals from the TSP, on the other hand, are fully taxable, though you can leave your TSP account to your heirs in a tax-deferred manner through the IRA option noted above.

Joe added TSP participants should withdraw from the TSP only what they need to meet expenses. It doesn't make sense to set up withdrawals of $1,000 per month and keep most of the money in your checking account, because you pay taxes on the withdrawals. Transferring some or all of your TSP balance to an IRA can allow for flexibility in managing withdrawals on an as-needed basis.

Remember, estate planning can be done in such a way that you preserve your assets for the future and for your heirs. But as your needs change, your strategies also might need to be adjusted to accommodate your changing needs.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.

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