A client sat across from my desk in Manhattan last month with a $600,000 traditional IRA and a husband who had just suffered a severe stroke. His nursing home care would cost roughly $17,000 a month. Her first question was whether she had to drain her entire retirement account to pay the facility. She had read an article suggesting she immediately transfer her IRA into an irrevocable trust—a move that would have triggered a massive income tax bill. The reality of elder law rarely matches internet advice.
Panic over long-term care often leads to disastrous tax consequences. In New York, the rules regarding retirement accounts and Medicaid offer stronger protections than many realize. You do not necessarily need to move your IRA to protect the principal from a nursing home, but you must understand exactly how the state classifies these assets.
The Payout Status Exemption
Under current Department of Health guidelines, an IRA is considered an exempt resource for Medicaid eligibility purposes provided it is in “payout status.” This means the account owner is taking regular, periodic distributions based on their life expectancy. If you are taking these required monthly or annual distributions, the state cannot force you to liquidate the entire account to pay for care. The principal is protected.
The caveat lies in the distributions themselves. Those payouts are considered income. If the person requiring nursing home care is the IRA owner, that income must be contributed toward their cost of care—what the state calls Net Available Monthly Income (NAMI). However, if the healthy spouse (the “community spouse”) owns the IRA, those monthly distributions are theirs to keep, up to the Minimum Monthly Maintenance Needs Allowance established by state law.
The Tax Trap of Irrevocable Trusts
We frequently see families attempting to execute do-it-yourself asset protection by moving every asset they own into a trust. This is a critical error when it comes to tax-deferred retirement accounts.
You cannot simply re-title a traditional IRA into the name of a Medicaid Asset Protection Trust. By definition, an Individual Retirement Account must be owned by an individual. To place those funds into a trust, you must first liquidate the account. Liquidating a half-million-dollar IRA in a single year means adding a half-million dollars to your taxable income. You could easily lose a third of your wealth to the IRS and state tax authorities in one stroke.
Prudent planning requires balancing these tax liabilities against long-term care contingencies. We do not destroy the village to save it. Instead of blindly liquidating, we look at the entire financial board. If an IRA must be drained to protect it, we generally advise spreading those withdrawals over multiple tax years to manage the tax bracket impact. We transfer the after-tax proceeds into an irrevocable trust only when it makes mathematical sense.
Surviving Medicaid Estate Recovery
Protecting the principal during your lifetime is only half the battle. If your IRA is exempt while you are alive because it is in payout status, what happens when you pass away? Does the state seize the remaining balance to recoup the cost of your nursing home care?
This is where deliberate beneficiary planning becomes paramount. Under New York Social Services Law § 369, Medicaid estate recovery is currently limited to the probate estate. Your probate estate consists only of assets that pass through Surrogate’s Court—meaning assets held in your sole name with no designated beneficiary.
Under EPTL § 13-3.2, an IRA operates via a beneficiary designation contract, bypassing probate entirely. If you name your children or other individuals as the direct beneficiaries of your IRA, the remaining balance transfers to them outside of Surrogate’s Court. Because the asset never enters the probate estate, it remains out of reach of the state’s Medicaid recovery efforts.
This protection vanishes instantly if you name your estate as the beneficiary, or if your named beneficiary predeceases you and you have no contingent beneficiary listed. In that scenario, the IRA defaults into your probate estate, and the state’s claim takes precedence over your heirs.
The Difference Between Crisis and Deliberate Planning
If we have five years before a nursing home is needed, our options expand significantly. While liquidating a large IRA all at once is disastrous, withdrawing smaller, strategic amounts over a period of five to ten years allows us to manage the income tax impact. We can then funnel those after-tax dollars into an irrevocable trust, safely beyond the five-year Medicaid look-back period. This deliberate drawdown strategy requires coordination with your CPA, but it is often the most effective way to transition tax-heavy retirement accounts into fully protected legacy assets.
When the sick spouse is the owner of a substantial IRA and we are already in a crisis, the mandatory distributions can create a severe drain on family resources, as all of that income goes directly to the facility. In these specific circumstances, New York offers a unique legal mechanism known as spousal refusal. This allows the well spouse to legally decline to contribute their income and assets to the care of the institutionalized spouse. While the county may eventually bring a lawsuit to recover costs, counties frequently settle for a fraction of the actual cost of care, allowing a family to preserve the bulk of their savings.
Stewardship.
That is the actual goal of this work. We are not just filling out forms—we are acting as custodians of a family’s generational wealth. It requires looking past the immediate crisis of a nursing home admission to engineer an outcome that protects both the patient and the surviving family members.
Protecting an IRA requires a deliberate analysis of tax exposure, Medicaid regulations, and your family’s specific financial landscape. Do not make a six-figure tax mistake based on generic internet summaries. To review your current strategy, schedule a beneficiary audit and long-term care assessment with our office.
