Lifestyles over 50 Finance & Money
VA Pension benefits are “nonservice connected” disability benefits that provide a monthly tax-free income to eligible wartime veterans and their surviving spouses. A married veteran can receive up to $2,169/month, a single veteran up to $1,830, and a surviving spouse up to $1,176. Pension benefits are particularly valuable to seniors because they can help defray the high cost of medical expenses (e.g. in-home care, adult day care, assisted living).
The VA unexpectedly issued new regulations on September 18, 2018. The new regulations became effective on October 18, 2018 and subject applicants to complex Medicaid-like eligibility rules including: asset limits, 36-month look-back period and transfer penalties. The new rules also substantially impact the use of trusts and annuities.
Net Worth, Annuities and Trusts
One major change is a net worth limit of $123,600. The net worth limit will increase per the Social Security benefit increase percentage each year, if any. The principal residence and “reasonable lot area”, generally defined as not more than two acres is exempt. Net worth includes all income and assets owned by the veteran (and spouse if married). With limited exceptions, transfers to trusts and the purchase of annuities count as penalized transfers.
Look-Back and Penalty Period
Another major change is a new 36-month look-back period. Transfers made before October 18, 2018 do not apply. Only “covered assets” that are transferred will be penalized. A “covered asset” is an asset that was part of the applicant’s net worth and, had it not been transferred, would have caused the applicant to be over the net worth limit.
Example: John has $85,900 in assets and $30,000 in income at the time of application on December 1, 2018. Before he applied, John transferred $30,000 to his son on November 1, 2018. Had John not transferred $30,000, his net worth would have been $145,900 which would have put him over the limit of $123,600. The difference between the net worth limit and what John would have had (i.e. $145,900) if he did not make the transfer is $22,300 and will incur a penalty. The penalty is based on a formula where the denominator is currently $2,169.
The penalty starts the month after the transfer is made. There is also a 5-year cap. In the above example, the penalty for transferring $22,300 of covered assets is 10 months ($22,300 / $2,169 = 10.28 months rounded down). The penalty would start on December 1, 2018 and run for 10 months.
Planning Under the New Rules
Planning opportunities include several options. One is to spenddown paying for medical expenses (e.g. in-home care, assisted living), taking a vacation, buying personal property including household goods, buying or upgrading a vehicle, paying off debt, buying or renovating a home, or purchasing an irrevocable pre-paid funeral and burial policy.
A second is to consider transferring assets either outright or in trust and waiting out the 36-month look-back before applying. Transfer of the house to a properly drafted irrevocable trust can protect the home and avoid negative tax implications that otherwise result when making an outright transfer to others.
The new regulations increase the complexity of planning. Great care must be taken because actions used to create eligibility may have a negative impact on entitlement to other benefits (e.g. nursing home Medicaid). Negative tax consequences may also occur. That said, ample opportunities exist to help clients plan under the new rules.
This article was written by Attorney Dionysios C. Pappas of Vasiliadis Pappas Associaites, LLC, located at 2551 Baglyos Circle, Suite A-14, Bethlehem, PA 18020. The office phone number is (610) 694-9455.
Photo: Attorneys Dionysios C. Pappas, Stanley M. Vasiliadis, George M. Vasiliadis