Lynn Brenner's Family Finance

Does My Father's Bank Account Have To Be Used for His Medical Expenses?

Q: My question is about a bank account that my father has set aside for me that requires proof of death. He is bedridden and not able to leave a care facility, so Medicaid is going to start receiving his Social Security checks.

Will they consider this account an asset of his, and try to take it to pay medical expenses? --DW via email

A: What do you mean, will they consider this account his asset? It is his asset!

You may be in the habit of thinking of it as yours, but in fact this account belongs to your father. It won't be yours until he dies. That's why the bank requires proof of his death before letting you touch this money.

It sounds as if your father is receiving Medicaid assistance to pay his medical and/or long-term care nursing home bills. Medicaid's rules vary considerably depending on the state. But generally speaking, your father would have to spend most of his own income and assets on his care before he became eligible for Medicaid assistance. (And the payments your father made towards his care would go to the care facility, not to Medicaid.)

There are two 'exempt' assets for Medicaid purposes -- i.e., assets that your father wouldn't have to use to pay for his care before qualifying for Medicaid assistance. They are his primary residence and his Individual Retirement Account. His annual IRA distributions would have to be paid towards his care; but the IRA principal would be protected. (Of course, depending on the length of his nursing home stay, eventually the IRA principal would all be paid out in annual distributions.)

But the account you describe sounds like a straightforward 'pay-on-death' (also known as an 'in-trust-for') bank account, not an IRA.  In that case, as far as Medicaid eligibility is concerned during your father's lifetime the money in this account is available to pay for his needs.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c:) Lynn Brenner, All Rights Reserve

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Is Social Security Reduced for Military Retirees?

Q: I am retired from the U.S. Air Force and receive a monthly retirement check. I have been told by acquaintances that when I start to draw Social Security, my military retirement check will be deducted from my Social Security payments. I'm currently 65, and my plan is to continue working for at least another five years and now draw Social Security until I'm 70.

What's the correct information about receiving military retirement and Social Security? I really have been counting on receiving both checks when I do finally retire. --JD via email


A: Not to worry. You will.

Social Security benefits aren't reduced for people who receive military retirement benefits.

Your acquaintances were probably thinking of the fact that Social Security is reduced for people who receive government pensions based on jobs in which they did not pay Social Security taxes. 

But you have paid those taxes.

Social Security has covered people on active duty military service, and on active duty training, since 1957. And since 1988, Social Security has covered inactive duty service in the armed forces reserves, such as weekend drills. 

One additional thought:

Now that you're 65, you're eligible for Medicare. As a result, any health care coverage that you currently receive from the Department of Veterans Affairs or under the TRICARE or CHAMPVA program may change or be discontinued, says Linda Lauria, a Social Security Administration spokeswoman in New York City. For more information about this, you should consult the VA, the Department of Defense, or a military health benefits adviser.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c:) Lynn Brenner, All Rights Reserve

Can a Widow Take Money From an Inherited IRA Without an Early Withdrawal Penalty?

Q: I have a friend whose husband passed away last month. He was 13 years older than she is, and already collecting Social Security. He had an IRA but she is unable to collect from it without the large penalty before she's 59 and a half. Is there any way to roll the IRA over into something she would be able to collect from? Also, is there any way for her to obtain help from Social Security before she turns 60 years old? During her 35 years of marriage, she worked very little outside the home. --RT via email

A: You're mistaken in thinking that your friend can't take penalty-free IRA withdrawals. All her withdrawals will be taxable income. But she can avoid the 10% early withdrawal penalty.

As a surviving spouse, she has two choices:

The first is to roll the IRA into her own name, an option that's not available to other IRA beneficiaries. The advantage of doing that is that it prolongs the tax-deferred life of the account: As the IRA's new owner, she won't be required to take withdrawals until she's over 70 and a half. The disadvantage is that there will be a 10% penalty on withdrawals she takes before she is 59 and a half.

The second choice is to keep the IRA in her late husband's name and remain a beneficiary. If she does that, there is no early withdrawal penalty regardless of her age, says Barry C. Picker, a Brooklyn New York tax accountant.

If she keeps the account as an inherited IRA, she won't be required to start taking distributions until the year her late husband would have been 70 and a half, he adds -- but any withdrawals she does take will be penalty-free.

The earliest she can collect a Social Security widow's benefit is age 60. (Younger widows and widowers receive a survivor's benefit only if they are caring for a minor child.) But if she applies for a widow's benefit before reaching her own full retirement age, she'll receive a smaller amount.

Assuming she was born between 1945 and 1956, her full retirement age is 66. If she starts collecting a widow's benefit at 66, she'll receive 100% of the Social Security benefit her husband was entitled to when he died. If she starts collecting it at 60, she'll get 70.5% of that amount.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c:) Lynn Brenner, All Rights Reserve

Exactly When Does the Social Security Annual Earnings Cap Disappear?

Q: I will file for Social Security in August when I turn 66, but I intend to keep on working. I will earn $100,000 for the 2010 tax year. Am I right that from August on, I can receive my full benefit?  Or does the Social Security earnings cap apply on an annual basis, which would mean I forfeit some or all of my 2010 benefits? --SM via email

A:  As of  the month in which you turn 66, you can earn any amount, while collecting Social Security, without forfeiting any of your benefit. If you apply for Social Security in August, you'll get your first unreduced check in September.

When you apply for your benefit, also ask the Social Security Administration to look back at the six months prior to your application to see if you're entitled to a discounted benefit for that six month period. It will depend on how much you earned during that time.

In the year that you turn 66, you forfeit $1 of benefits for each $3 you earned above $37,680 prior to your birthday, says Jane Zanca, a Social Security Administration spokeswoman in New York.

Let's say that you earned $67,680 in 2010 before your birthday, for example. That's $30,000 above the annual $37,68 cap. You'd forfeit $10,000 of your benefits during those six months -- $1 for each $3 above the cap. But if your benefit is $2,000 a month (or $12,000 for the six month period before August), you'd still be entitled to keep $2,000 of it.

One less welcome bit of news: As long as you continue working, you will have to pay Social Security and Medicare (otherwise known as FICA) taxes. The FICA tax applies to the first $106,800 that you earn in 2010, whether or not you're collecting Social Security. 

This only seems unfair to people who mistakenly think of Social Security taxes as 'contributions' to their own retirement accounts -- a warm and fuzzy notion that unfortunately just isn't accurate. Look at it this way: There's no exemption from taxes that support the public school system -- even for people who have no kids, or have kids in private school, or have kids who've long since graduated from school. And there's no exemption from Social Security taxes, even for people who are already collecting a benefit; those taxes apply to everyone who works.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c:) Lynn Brenner, All Rights Reserve