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The U.S. Department of Veterans Affairs (VA) has put in place changes to their rules around eligibility for non-service connected veterans benefits. These rules, which took effect on October 18, 2018, affect issues such as net worth limit, divestment penalty rules, spend-down (including transfers to annuities), joint ownership of assets, the look-back penalty, and more. Here are some basics regarding the changes to the VA Improved Pension rules.
Net Worth Limit Changes to VA Improved Pension
As of October 18, 2018, the maximum net worth for an eligible veteran is equal to the maximum Community Spouse Resource Allowance (CSRA) as used for Medicaid eligibility. The net worth limit in 2018 is $123,600, and may change in future years. The CSRA amount was selected in order to avoid the outcome that an applicant would need to be impoverished in order to qualify for improved pension benefits. Assets and income together to determine maximum net worth.
The new net worth limit is a “bright-line” test, which should clarify the process of determining who is eligible for benefits and streamline the process of applying for benefits. In order to be eligible for improved pension benefits, a claimant must be below this limit. In the past, net worth calculations took into account factors such as life expectancy and the rate of asset depletion; these calculations will no longer apply.
According to the VA, net worth includes the fair market value of all are all non-exempt assets owned by the claimant and their spouse, less encumbrances and liens. “Exempt assets” include only a primary residence (with a lot size up to two acres), personal property items, a prepaid funeral contract and burial plot, and assets transferred prior to October 18, 2018. All other assets are considered “countable assets.”
In addition to all countable assets, the VA’s definition of net worth includes one year’s worth of gross income reduced by one year’s worth of allowable unreimbursed medical expenses (“UME”). For example, if the claimant’s annual gross income is $50,000.00 but the claimant pays $30,000.00 in the same year for in-home care, then the difference, $20,000.00, is added onto the claimant’s other countable assets to establish the claimant’s true “net worth.”
Reducing Net Worth By Spend-Down
Prior to, or even after, filing an application for improved pension benefits, a claimant may decrease their assets by spending them down on products or services purchased at fair market value, or by gifting assets. However, the amount “gifted” must not be such that it would have an adverse effect on the CSRA. Any transfer of assets made for less than fair market value will be penalized if the amount exceeds the CSRA limit (See examples below).
Jointly-Owned Assets
As of October 18, 2018, creating a joint account will not be an effective way to reduce assets. If a joint account is created prior to that date, only the claimant’s pro-rata portion will be counted toward net worth. The catch? It must be a true joint account, not one created to circumvent benefit eligibility rules. For this reason, it is essential to have assets dating back as long as possible to show true joint ownership of the account or asset.
Purchases of Annuities Affected
In the past, claimants could purchase an annuity as a way to spend down their net worth and more rapidly qualify for improved pension benefits. However, the new rules limit claimants’ ability to spend down funds by transferring them into annuities.
Under the new rules, monthly payments from an annuity will be countable as income. For those annuities which can be liquidated, the entire amount of the annuity will be counted in net worth.
The VA views annuities as a vehicle for transferring assets for less than their fair market value, and sees them as a tool to reconfigure assets in order to decrease net worth, and become eligible for VA benefits. (Compulsory annuitization of some employer-based contracts as of retirement do not come under the heading of these rules).
Under the new rules, monthly payments from an annuity will be countable as income. For those annuities which can be liquidated, the entire amount of the annuity will be counted in net worth.
Assets that have been transferred into an annuity for the purpose of reducing net worth will suffer a penalty. If the annuity cannot be liquidated, it will be captured in the three year “look-back” period described below.
Look-Back Period and Implementation of Penalty Period
Under the new rules, if a claimant makes a transfer for less than fair market value during the three years (“look-back period”) prior to applying for benefits, the transaction will be penalized. The claimant will be ineligible for benefits for a specified time period. The VA will scrutinize transfers that took place during this three-year period; if reason is found to penalize a transfer, the penalty period will start one month following the date of the last transfer, and could last up to a maximum of five years.
How is a penalty period determined? Using the monthly rate for a veteran (with a dependent and rated in need of aid an attendance) in effect on the date of the claim. This rate is currently $2,169.00. The penalty period divisor is the monthly maximum. The final figure will be rounded down to the nearest dollar.
It is worth noting that the VA review of transfers for less than fair market value during the look-back period will only consider those transfers that were above the net worth (“CSRA”) limit.
So, for example, a claimant with a net worth of $200,000.00 who transfers $50,000 on November 1, 2018 would have a penalty period of 23 months ($50,000.00 divided by $2,169.00 equals 23.05, which, rounded down, would be 23).
On the other hand, a claimant with a net worth of $100,000.00 who transfers $50,000 on November 1, 2018 would not have any penalty period because the claimant’s net worth was already below the CSRA ($123,600.00) limit even before the transfer.
If you have questions about changes to VA improved pension rules, we invite you to contact our law office.
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