How to Use the “Name on the Check Rule” MCA Strategy to Protect the Institutionalized Spouse’s IRA
The “Name on the Check Rule” is a Medicaid Compliant Annuity (MCA) strategy involving a Medicaid guideline that is used to determine who income belongs to. As the guideline goes, any income payable to a particular spouse is only available to that spouse. In other words, the income belongs to the person whose name is on the check. When crisis planning with an MCA, this guideline may be used in cases where the institutionalized spouse owns a countable IRA.
Read More: How are IRAs Treated in Your State?
How Does the “Name on the Check Rule” Strategy Work?
With the “Name on the Check Rule,” the institutionalized spouse transfers their IRA to an MCA and designates the community spouse as payee of the contract. This allows them to avoid the immediate tax consequences of liquidating their IRA while directing the MCA payments to the spouse at home rather than increasing the ill spouse’s Medicaid co-pay to the nursing home. This strategy also allows the couple to take advantage of favorable MCA beneficiary rules. Since the institutionalized spouse owns the IRA-MCA, the community spouse can be named primary beneficiary ahead of the state Medicaid agency. Although the community spouse receives the MCA payments, the tax liability remains with the institutionalized spouse, as they are still the owner of the IRA.
Click here to view a case study of the “Name on the Check Rule.”
Considerations When using the “Name on the Check Rule”
- Structure the MCA over the institutionalized spouse’s full Medicaid life expectancy.
Although not required for Medicaid compliance, we recommend using the full Medicaid life expectancy as the annuity term. This is the most conservative approach and also spreads out the tax consequences over multiple calendar years as payments are made. - Consider a potential MMNA shift to the community spouse
If the community spouse is entitled to an income shift from the institutionalized spouse under the Monthly Maintenance Needs Allowance (MMNA) rules, the “Name on the Check Rule” strategy may not be necessary. In these cases, the institutionalized spouse may remain payee of their IRA-MCA, and the income will still go to the community spouse. - Opt to receive the MCA payments in the form of paper checks.
Although MCA carriers offer a direct deposit option for payments, we recommend choosing to receive paper checks made payable to the community spouse. This serves as additional evidence to the Medicaid caseworker that the income from the payments is designated for the community spouse only. - Consider the value of the IRA and medical expense deductions.
If the institutionalized spouse owns a small-value IRA, liquidating the account and transferring the net proceeds to the community spouse may be more practical. The tax consequences of full liquidation may be offset by medical expense deductions when filing taxes that year.
Make sure you consult a tax expert before liquidating your client’s IRA or transferring it to a Medicaid Compliant Annuity.
While the “Name on the Check Rule” is a great option for most clients, its success varies by state. For the latest information on the viability of this MCA strategy in your state, contact our office directly.
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