The time to act is NOW.
On Tuesday, September 18, 2018 the VA released new regulations applicable to the VA pension benefit, variously known as “improved pension,” “new pension,” “special monthly pension,” “housebound” or “aid and attendance.”
The regulation is set to take effect thirty days after publication. This has set up a less than 30 day count-down for those who may have been considering asset transfers or trust funding to qualify for potential VA benefits within the next three years.
The regulations provide new rules regarding how much net worth a VA benefit applicant may retain and qualify for benefits (actually some good news there) and provide new Medicaid-like transfer penalties (sanctions).
This brief memo discusses those rules applicable to needs-based VA benefits (those that impose asset and income limits). This memo does not discuss various rules regarding activities of daily living applicable to independent, assisted, or in-home living arrangements. Nor does this memo discuss any changes to service-connected benefits.
Some attorneys will read this. I have therefore given them a hand by inserting some citations. References to the new regulations under Title 38, Part 3, of the Code of Federal Regulations are shortened to “Reg. § 3.2**” format.
To emphasize: ACTION MUST BE TAKEN NOW IF YOU INTEND TO TRANSFER ASSETS AND QUALIFY FOR THESE BENEFITS SOON AFTER THE TRANSFER.
New Net Worth Limits
Let’s get the good news out of the way. The new net worth rules for an applicant are a relief from the old and ambiguous asset rules. Under the old rules an applicant could not have more than $80,000 in countable assets in any event, and VA caseworkers routinely lowered this limit depending upon an individual applicant’s age, health, or marital status. In fact, the VA Commentary (the “Commentary”) to the new regulations makes this very observation and notes how unfair that standard is.
Now the VA has borrowed the federally-mandated Medicaid Community Spouse Resource Allowance (CSRA) as a net worth limit. The CSRA is an amount set by the Centers for Medicare and Medicaid Services on an annual basis and is used to determine the level of countable assets the spouse of a nursing home resident is allowed to retain while qualifying the nursing home resident for Medicaid. This year (2018) that amount is $123,600.
Under Reg. § 3.274(a)-(b) we now have a bright-line net worth test equal to the CSRA ($123,600 . . . it will go up in 2019). Though the CMS Medicaid number is obviously intended for use by a married couple (one spouse in the community, the other in the nursing home), in the VA context it applies to every applicant, regardless of marital status.
Example: Harry is married to Mildred. They have $100,000 in VA countable assets. Under the old/existing scheme Harry would not qualify for VA benefits. Under the new scheme he will (with room to spare).
Example: Harry died. Mildred needs to apply for VA benefits. Under the new rules, no problem. As long as she is under $123,600.
I’ll have some more specific comments about trusts and annuities, and how they relate to net worth, below.
The Dark Side: Residential Real Property
Under the old rules, a residence and underlying/surrounding land “similar in size to other residential lots in the vicinity” were not countable. If every residence in the area was on a 50 acre farm, the applicant’s residence and surrounding farm land would not be countable.
The new rules impose a 2 acre limit “unless the additional acreage is not marketable.” The examples given with regard to nonmarketable acreage related to acreage “only slightly more than 2 acres,” property that might be inaccessible (surrounded by other owners, perhaps) or property subject to zoning limits that could prevent a sale.
Example: Under the old rules Dad living on 10 acres of land, which seems to be the semi-rural standard in his neighborhood. Under the new rules, Dad likely has eight acres of countable real estate.
Under old VA rules, there has been NO transfer penalty. This means that Mom or Dad could transfer excess assets and apply for VA benefits the next day. New Reg. § 2.276(e) now imposes transfer penalties.
The Commentary and the regulations clearly say that the new transfer rules apply to transfer made AFTER the rules become effective. You have until October 18, 2018 to transfer excess assets without being subject to the new rules.
Effective October 19, 2018, transfers of “covered assets” transferred after October 18, 2018, will be reviewed for a period of thirty-six (36) months to determine whether a transfer penalty (a period of ineligibility for VA benefits) should be applied.
Below, I will review what transfers will be sanctioned (not all transfers will be) and how the penalty will be calculated
Applies to “Excess Asset” Transfers Only
The term used by the VA is “covered assets.” A transfer penalty applies to those amounts transferred that exceeded the net worth limitation and only to the extent that, if retained, would have caused the applicant to exceed the limitation. See Reg. § 3.276(a)(3).
Example: Edith transferred $20,000 to her daughter on October 20, 2018, and applied for VA benefits on November 1, 2018, with $70,000 cash in her checking account. There will be NO VA transfer sanction because Edith was below the net worth limit before the transfer and the transfer did not cause her to dip below the limit (she was already below it!).
Example: Joe transferred $50,000 to his son on October 20, 2018. He applied for VA benefits on November 1, 2018. At the time of the application he had $100,000 cash. Accordingly, at the time of the transfer Joe had $150,000. The net worth limit is $123,600. His net worth at the time of the transfer exceeded the net worth limit by $26,400 ($150,000 – $123,600). As a result of the transfer, $26,400 will be subject to a penalty (which will be calculated below).
Calculating the Transfer Penalty
Once the covered asset amount (the amount subject to the transfer sanction) has been determined, the penalty or sanction can be determined.
Divide the value of the covered assets by a divisor that will always be the “Maximum Annual Pension Rate” (MAPR) for a veteran with one dependent. The MAPR for a veteran qualifying for Aid & Attendance benefit (the highest) with one dependent is $26,036 annually. The regulations say to divide that by 12 and drop the cents. Reg. § 3.276(e)(1). In 2018 that amount is $2,169 ($26,036/12 = $2,169.67).
It does not matter at whether the transfer penalty is being calculated for a single veteran, a married veteran, or a widow of a veteran. Always use the MAPR for a veteran with a dependent divided by 12.
Example: Joe, from above, had a covered amount of $26,400. His sanction is 12.17 months.
When the Penalty Begins to Run and When It Ends
The penalty begins to run on the first day of the month following the month of transfer. Reg. § 3.276(e)(2). The sanction ends on the last day of the month in which the sanction expires and the applicant is again eligible for benefits on the first day of the following month. Reg. § 3.276(e)(3).
Example: Back to Joe. Joe transferred $50,000 on October 20, 2018. We determined that $26,400 was the covered amount, and that generated a sanction of 12.17 months beginning November 1, 2018. The 12.17 month sanction period expired sometime during November, 2019, and Joe would be eligible for benefits beginning December 1, 2019.
Can a Transfer Be Cured?
Yes. A transfer can be corrected, wholly or partially, if the correction is made within certain time periods (involving notice from the VA and notice back to the VA that corrective action has been taken). I am not going to dwell on that topic in this article. Since we have enough to deal with now, we’ll come back to it.
Trusts and Annuities
The new rules add some unwelcome clarity to the use of trusts and annuities.
A bit of history: I have explained to my students and clients for years that under Medicaid and SSI the asset transfer rules apply only to assets that, although once owned by the applicant or a spouse, are no longer countable or available assets. Conversely, if the asset is deemed to be available or countable, the transfer rules are inapplicable. This may seem simple, but it is easy to mix the two types of rules up.
Remember: If the transfer rules apply, it is because the asset is no longer deemed available. Now to the new VA regulations.
Reg. § 3.276(a)(5)(ii) clearly says that a transfer that reduces net worth is a sanctionable transfer UNLESS the applicant can liquidate the entire balance transferred for his or her own use. The Commentary discusses at length that it is irrelevant that the transferred asset produces income. The transfer rules will sanction the transfer of the principal asset and the income rules will result in payments back to the applicant as countable income.
This, of course, is what occurs upon the purchase of an annuity. The single premium is paid to the insurance company, and an annuity stream comes back to the annuitant. The regulations and the Commentary explicitly apply this concept to annuities.
If an annuity is purchased, yet the applicant can liquidate the annuity, then the asset is countable. If an annuity is purchased and the applicant is no longer able to liquidate the asset for his or her own use, it is a transfer (though it will throw off countable income to the applicant).
In my opinion, this will all but kill the use of annuities in short-term/crisis VA benefit planning. In fact, the commentary devotes considerable space to a discussion that this was the very intent given the government’s perception that veterans were being abused by annuity sales schemes.
There has been considerable confusion over the years about the VA treatment of trusts, particularly irrevocable grantor-type trusts in which the grantor has retained an income interest. The question was, did the retention of an income stream constitute enough of a “use for the benefit of the applicant” so as to render the entire trust countable for VA benefit purposes?
The regulations have provided an answer.
Reg. § 3.276(a)(5)(ii) specifically applies to both trusts and annuities. All of the commentary directed to annuities applies to trusts.
If an applicant transfers assets to a trustee and surrenders all of his or her right to liquidate the trust for his or her own benefit, yet retains an income interest, the result is no different than the purchase of an annuity.
If an asset transfer to trust is sanctionable (as it clearly is under the regulations if the applicant has retained no right to liquidate or control the trust for his or her own benefit) the transferred assets cannot be deemed available.
Of course, I believe that nongrantor, irrevocable trusts are clearly not countable (and never were). On the other hand, I believe it is now clear that irrevocable “income only” trusts are also not countable (although any income distributed to the applicant clearly is countable income).
Alas, while the trusts are not countable, funding them is now a potentially sanctionable event (depending on whether the assets transferred to trust are considered “covered assets” – discussed above – and whether the funding event occurred within 36 months of the application or whether the sanction may have run its course during the preceding 36 month look back period).
Trusts can still be a useful tool. But the potential applicant (or applicant family) needs to have the foresight to start early with planning.
In the meantime, if you (or a client of yours if you’re an attorney reader) have been meaning to “git ‘round to it” on planning you have just a few weeks left. Get on it! Now!
If you are not an attorney and think the new regulations might affect you, please make arrangements to see an attorney with experience in this area and who understands these rules. Of course, I have experience in this area and I understand these rules . . . otherwise I wouldn’t be writing this article, now, would I?
Mason Law, PC, has limited slots available to help. Because of the limited time, we will likely recommend quick remedial action with a plan to ‘circle back’ after the deadline has passed to complete a plan. Please do not call after the first week in October and expect a miracle appointment slot to open and for us to miraculously pull a trust out of our bag and fund it days before the deadline.
Call us in Charlotte at 704-276-6446 or Asheboro (Triad) at 336-610-6000.
Attorney friends, feel free to share!
Robert A. Mason, CELA, CAP, is a board certified specialist in elder law, a member of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys (less than 100 nationwide), and a fellow of the American College of Trust and Estate Counsel.