New ways of counting assets. Penalties for transferring assets.
If you are even remotely interested in VA benefits such as Aid and Attendance or Housebound benefits under the VA Special Monthly Pension or Improved Pension you should read this article.
You’ve been warned.
Last week the Department of Veterans Affairs (VA) proposed sweeping new regulations that will change the way valuable benefits are calculated for qualifying veterans or their surviving spouses.
If you are a veteran, the surviving spouse of a veteran or you know someone who is, and if you or “that someone” has even a remote chance of applying for benefits in the next few years, you must read thus. Things are about to change Big Time.
As I have been writing the past few years, Congress has threatened similar changes and has come close on a few occasions. Most of the bipartisan efforts were defeated because the VA benefit provisions were attached to bigger (doomed) bills that went down in flames.
This time is different because the VA is acting on its own with regulations. Barring something completely unforeseen some close variation of these regulations will become law sometime this year. We just don’t know when.
VA Benefits Background
Veterans who have served 90 days or more active duty during a war time period and have not been dishonorably discharged may be entitled to certain VA benefits if their health care expenses outstrip their income. If the veteran is “no longer with us” his or her surviving spouse may also qualify.
Read my explanation of how the benefit currently works, and then be sure to come back to this article. What you read for the current explanation is about to become HISTORY.
If you do not care to read about the current benefits, here is my 30 second synopsis:
If the veteran or the spouse has qualifying medical expenses, those will be deducted from income to calculate adjusted income. The difference between the VA benefit rate that applies to the individual and the adjusted income is the amount the individual will receive in VA benefits. The current VA 2015 benefits levels are posted on this website.
For example, if Archie qualifies for VA benefits due to his service during the Korean Conflict and he has income of $2,000 monthly but has $1,800 medical expenses, his adjusted income is $200. The maximum monthly benefit he could possibly be entitled to (because he is married to Edith) is $2,120. However, because he has $200 adjusted income, he will actually receive $1,920 ($2,120 ̶ $200).
We’re not done yet.
Next we have to look at Archie’s and Edith’s assets to determine what their net worth is and whether they are over the net worth limit. Not all assets count, but most do. I have explained all that elsewhere. In any event, they cannot have more than $80,000 worth of countable assets . . . but VA claims examiners regularly lower the $80,000 level on a case-by-case basis depending on their evaluation of the claimant’s income, age, health, marital status and the like.
Crazy. Makes applying for VA benefits like Aid and Attendance very interesting.
Finally, there are currently NO transfer of assets penalties like Medicaid. Theoretically a millionaire could qualify under the asset test by giving everything away and applying the next day. But not for long!
Proposed VA Benefits Regulations: Turbulence Ahead.
New Asset Counting Rules
As mentioned above, VA has been applying a muddled asset test of “$80,000 or less” as a standard for qualification. As a practice, we at Mason Law, PC have submitted applications that take a “low ball” or conservative approach. Quite often we attempt to lower the claimant’s asset levels to around $30,000 “just to be safe.”
Perhaps on the positive side, the new regs will add a bright line test. Borrowing from Medicaid rules that allow a maximum community spouse resource allowance (CSRA) of $117,240 (2015 – this is adjusted every year), the proposed regs will allow countable assets plus income for the year (the proposed regs call this “net worth”) that total less than the CSRA in effect at the time of the application to be held without jeopardizing eligibility.
For example, if Archie and Edith had countable assets equal to $80,000 PLUS annual household adjusted income of $30,000 the combined $110,000 (called “net worth”) would be under $117,240 and Archie would pass the asset test. We’ll discuss what assets count, as well as how income is counted, below. Had Archie and Edith had assets of $100,000 Archie would not qualify because their net worth would be $130,000). End of story.
What Doesn’t Count
A principal residence and a “reasonable amount of land” around the house also do not count. Under the proposed rules, the VA will look to look to surrounding properties to determine a “reasonable” amount of land, but will cap it at TWO acres.
In other words, a house sitting on two acres when every other house in the neighborhood is on a quarter acre will result in 1.75 acres being counted. A residence sitting on a 100 acre spread out in farm country will result in one noncountable residence and 98 acres of countable real estate.
As under the current rules, automobiles and household effects (“consistent with a reasonable mode of life”) do not count. Also “basic living expenses such as food, clothing, shelter, or health care” will lower the asset level.
To recap, add the value of all assets, subtract the value of the home (subject to the limit on land), subtract reasonable living expenses for food, shelter, and clothing, subtract the value of automobiles (no new Ferraris) and personal effects, and ADD income for the year (discussed below).
See what the total is. If it is less than the CSRA ($117,240 in 2015), you’re good to go. If over, then “Houston, we have a problem.”
New Income Rules
The VA imposes separate rules for income, because if adjusted income is over the VA maximum benefit available to a claimant, the claimant receives nothing. In any event, the benefit payable will only be the difference between the adjusted income and the maximum benefit available. Reminder: You may look up the maximum benefit available on this website. Don’t panic.
Income consists of “payments of any kind from any source.” Social Security? Income. Payments from a trust? Income. An inheritance? Income. A gift? Income.
But wait! Casualty losses (the insurance payment for the wrecked car)? Don’t count. Capital gains from the sale of an asset? Don’t count – BUT the proceeds may be added to assets next year.
And finally, medical expenses are deducted from income.
Bear in mind the regs do TWO things with income. They use one year’s income as an add-in to asset values to calculate “net worth” discussed above. They also use income to determine whether you have income less than or more than the maximum benefit available to determine how much you may actually receive.
For example, you can deduct food, shelter and clothing from the combined income and asset level (“net worth”) to see if you are under $117,240. But you can only deduct medical expenses from income to determine if the adjusted income is less than the maximum benefit available.
You have to pass BOTH TESTS.
Example. Archie and Edith have combined unadjusted income of $4,000. Archie is in the assisted living facility and they pay $3,000 for that (assume the assisted living facility expense is a qualified medical expense). The maximum monthly benefit available for a veteran with one dependent is $2,120. Assuming no other deductible expenses, the adjusted income is $1,000 ($4,000 – $3,000), and Archie will be entitled to a maximum VA benefit of $1,120 ($2,120 – $1,000). HOWEVER, they can still deduct food, shelter, and other expenses to see if they meet the “net worth” rules above and are under $117,240.
Clear as mud!
VA Transfer Penalties
This is where things get really interesting.
Currently the VA rules impose no transfer of assets penalty. They will soon.
When the VA receives an application they will ask for information concerning any transfers of assets that have been made within three years. Assets more than three years old they will not care about.
Once the VA determines a penalty, the penalty can be as long as ten (TEN!) years. Obviously, if an applicant is looking at a long penalty, it is better not to apply within three years after a transfer. Rack up a long penalty and apply, say, in 2 ½ years and you are toast; wait six more months and you are fine.
The penalty is calculated by dividing the value of the transfer by the Aid and Attendance maximum monthly benefit in effect at the time of the application and available to the applicant. For example, if Archie transfers a $212,000 asset (say the family farm) and, applies within three years, the VA will calculate a penalty period of 100 months based on the Aid and Attendance maximum rate available to married couple ($212,000 ÷ $2,120). The penalty runs from the time of the transfer. So, if Archie applies 10 months after the transfer, the penalty will be 90 months.
However, if Archie and Edith transfer property, and 10 months after Archie dies Edith applies for VA benefits the result will be different. Because the maximum VA Aid and Attendance benefit available to a widow is just $1,149, the penalty will be 184 months ($212,000 ÷$1,149). Because she applied 10 months after the transfer, the actual penalty applied will be 174 months.
No fair? Yeah, well . . . .
The Take Away
The time to start planning is NOW. If you (or someone you know) think that VA benefits might be more than slight possibility within three years, now is the time to take action to protect assets.
As I often tell people, “No plan is a plan; no decision is a decision.”
We at Mason Law, PC have plenty of solutions.