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By Michael T. Lahti
Comprehensive proposed changes to the Veterans Administration (“VA”) laws were published on January 23, 2015. The changes would affect how the VA covers net worth, asset transfers and income exclusions for needs-based benefits. The rules were issue to “maintain the integrity of the pension program and to implement recent statutory changes” and to “respond to recent recommendations made by the Government Accountability Office (GAO), to maintain the integrity of VA’s needs- based benefit programs, and to clarify and address issues necessary for the consistent adjudication of pension and parents’ dependency and indemnity compensation claims.”
The changes, if implemented, will be very troublesome to some veterans. Whereas previously transfers could be made to open up benefits immediately, there would now be a 3-year waiting period. The changes would provide some certainty, however, concerning what assets veterans are allowed to keep when applying. Presently, there is no published amount as to what a veteran can have when applying, and the actual threshold seems largely dependent on subjective facts. The proposed rules would be objective, in that a veteran’s net worth allowable would be tied into the Medicaid limits.
If these rules pass, helping veterans and surviving spouses plan early will become necessary. Clients will have no reason to wait to engage the services of a veterans pension attorney.
Some of the Proposed Changes
Proposed rule 38 CFR §3.274 would impose a limit on net worth equal to the maximum community spouse resource allowance for Medicaid purposes ($117,240) on the effective date of the final rule, adjusted for cost of living expenses. Additionally the VA would add one’s annual income to a claimant’s net worth as well (which it presently does not do).
New definitions are contained in proposed rule 38 CFR §3.275. Subsection (a) defines “assets” as the “fair market value of all property than an individual owns, including all real and personal property, unless excluded under paragraph (b) of this section, less the amount of mortgages or other encumbrances specific to the mortgaged or encumbered property.
The residential lot area under the proposed rules would not exceed 2 acres unless the additional acreage is not marketable, and the primary residence remains excluded from the definition of assets; and if sold, the proceeds will not count if used to purchase another residence within the same calendar year as the sale. If the claimant is not residing in the personal residence it will still be excluded. Personal effects “suitable to and consistent with a reasonable mode of life” will be excluded from the total asset value.
The most far-reaching changes in 38 CFR §3.276 have to do with the new proposed rules concerning asset transfers and penalty periods. “Covered assets” that are transferred will be subject to a penalty period. A “covered asset” is an asset that “was part of the claimant’s net worth, was transferred for less than fair market value, and if not transferred, would have caused or partially caused the claimant’s net worth to exceed the net worth limit…” In other words, it appears that only the amount transferred in excess of the net worth provisions will be subject to a penalty.
For example: Assume the net worth limit is $115,920. A claimant now has total assets of $113,000 and no annual income. The claimant prior to applying for benefits gave $30,000 to a friend. Had the claimant not previously transferred the $30,000, his net worth would have been $143,000 and his assets would have exceeded the net worth limits. The “covered asset” amount is $27,080 (the amount subject to a penalty) as this represents that amount by which the claimant’s net worth would have exceeded the limit due to the covered asset.
A transfer for less than fair market value includes the sale, gift or exchange of an asset for less than fair market value, or the transfer to a trust or purchase of any financial instrument that reduces net worth and “would not be in the claimant’s financial interest but for the claimant’s attempt to qualify for VA pension,” including the purchase of an annuity.
The lookback period for all transfers would be 36 months immediately preceding the date the VA receives an original pension claim or a new pension claim after a period of non-entitlement. There is a presumption that an asset transfer made during the 36-month lookback period was for the purpose of decreasing net worth in order to qualify for pension, and there would be a 10-year limit on any penalty imposed. To calculate the penalty, the transfer would be divided by the monthly maximum applicable annual pension rate for pension with an aid and attendance allowance. A single veteran would use the aid and attendance allowance amount with no dependents, a married veteran would use the aid and attendance allowance amount with one dependent, and a surviving spouse would use the aid and attendance allowance amount from the death pension table. This is harder on surviving spouses. For instance, the aid and attendance allowance for a surviving spouse is currently $1,149. A transfer of $10,000 would result in a penalty period of 8.7 months. If a married veteran transferred the same amount the penalty period would only be 4.7 months.
The penalty begins the month following the transfer. If more than one transfer was made the penalty begins the first day of month following the last transfer. Entitlement to pension will begin the last day of the last penalty period month, with payment to begin the following month. Penalties can be “cured” by returning what was transferred.
If you have questions about these far-reaching changes, please give us a call.