Excess Asset Management

James (Jim) Swain, JDFounder and CEO of the

Academy of VA Pension Planners

Valerie Peterson, JD Executive Director of Elder

Counsel

This Session Will Cover

Opportunities

Problem Assets

Solutions

Skills Required

Knowledge about VA and Medicaid

Knowledge about different class and types of assets and income tax consequences involved in transferring assets

Knowledge of use of types of Trusts and the advantages and disadvantages of each type

Appropriate Amount of Assets

How to determine what is an appropriate amount of assets

How to determine which assets to retain

Ways to reduce net worth and protect assets

What does Excessive Mean?

There is no definitive guidance as provided by Medicaid

There is no clear cut regulation or rule that takes the discretion away from the VSR

If they have more net worth than can be excepted to be utilized during their lifetime they have excessive assets

Veterans Benefits Manual• M21-1MR, Part V, Subpart i, Chapter 3, Section A

d. Purpose of the Pension Program and the Basis for Evaluating a Claimant’s Net Worth

• The pension program is intended to afford beneficiaries a minimum level of security, and not intended to protect substantial assets or build up the beneficiary’s estate for the benefit of heirs. The Veterans Service Representative (VSR) determines whether or not the claimant’s financial resources are sufficient to meet his/her basic needs without assistance from VA. If a claimant’s assets are large enough that the claimant could use these assets to pay living expenses for a reasonable period of time, net worth is considered a bar.

e. Handling a Pension Claim in Which Net Worth Is a Factor

• When handling a claim in which net worth is a factor consider whether it is reasonable, under all circumstances, for the claimant to consume some of his/her estate for maintenance, and deny the pension claim, if a formal finding determines that the claimant’s net worth should be consumed for maintenance.

Maximum−How does the VA calculate the Maximum amount of assets allowed

Minimum−Why would we want to reduce their assets to the minimum amount

−How should we calculate the minimum amount they should keep

Appropriate Amount of Assets

VA CalculationsThere is assumption there is a “Rule of Thumb”−Not in regulations

−May be true on low end

Age Weighted Analysis−Calculate amount of assets that will be

excepted to be utilized during the claimant’s life expectancy

−Easy to abuse Claimants

Age Weighted Analysis

Cash Flow (with VA pension) after medical expenses and life expectancy

Some nominal amount may be allowed

Formula for maximum allowed assets

(IVAP + VA Pension) *life expectancy

CalculationsAssume Couple with $40,000 of countable assets

Examples #1 #2 #3 IVAP ($4,500) ($2,500) $ 100Pension 1,959 1,949 1,849Cash Flow ($2,541) ($ 541) $1,949Life Expectancy 36 36 36Allowable Assets $91,476 $19, 476 $ 0

#1 would qualify as the assets would be used during the life expectancy but #2 might not and #3 would not.

Ways to Reduce Net Worth and Protect Assets

There are no penalties for gifting assets prior to filing for benefits

No transfers should take place after filing the application (although there is no reporting requirements for the house)

Gifting assets directly to children has its own risks

All transfers will affect Medicaid qualification

VA’s Net Worth Analysis

The VA’s analysis of what is the appropriate amount of assets to allow a claimant to retain is not logical. Plan around these limitations. Structure client’s affairs so they benefit the client while not giving the VA any justification for disallowing the claim.

Planning Opportunities

Trusts

Income Tax Analysis

Referrals to Financial Planners

Restructuring of Assets

Trust Settlement

Planning Opportunities

Trust

−VAPT (Veteran Asset Protection Trust)

−IDGT (Intentionally Defective Grantor Trust)

Problem Assets

Certificates of Deposit

Annuities

IRA and Qualified Plan Accounts

Appreciated Property

Closely Held Business

Problem Assets (cont’d)

Residence

Joint Accounts

Life Insurance Policies

Marital Trusts

Credit Shelter Trusts

Certificates of Deposit

These are one of the easiest assets to handle

The major issues are the Bank’s reluctance to change ownership and charging penalties

The penalty will be based on the remaining time to maturity and the interest rate

Annuities

This is a subject that causes the most confusion

The word annuity means different things

Taxation of Annuities

There are two types of annuities

-Deferred

-Immediate

Annuity Taxation Issues

Gain is taxed at ordinary income rates

Gain is always first out

If ownership is changed, gain must be recognized by transferee

Types of AnnuitiesDeferred Annuity

−The annuity value is still owned by the purchaser

−The owner can liquidate the annuity

Immediate Annuity

−Deferred annuity converted to a stream of guaranteed payments

−The annuitant does not own the assets in the annuity

−They are owned by the life insurance company

Deferred AnnuityThis is a countable asset

There are different types of deferred annuities

−Variable

−Fixed

−Indexed

Income taxes

Surrender penalties

Immediate annuity

Immediate AnnuityMoney is given to the insurance company to purchase guaranteed income for a fixed period of time, such as life or five years

This purchase will convert a countable asset to an income for both VA and Medicaid

Medicaid rules will count the guaranteed annuity payments in excess of the life expectancy as an asset

VA has no rules regarding annuities

IRA and Qualified Plans

Roth IRA

Regular IRA

Qualified Plan

Appreciated PropertyStock

Closely Held Business

ResidenceJoint Accounts

Life Insurance

Martial Trusts

Credit Shelter Trusts

Closely Held BusinessIssues

−Step-up in basis at death

−Transfer of basis

Not a typical situation

Who will manage company

Can business be sold

ResidenceNot a countable asset

121 exemption offsets gain

Gift of residence will transfer basis

Joint Accounts

Easiest way to deal with excess assets

The account value is divided by number of owners

Life Insurance PoliciesSmall policies are not counted

Transfer of policy will not be a taxable event

Transfer within three (3) years of death are included in the estate of the deceased

Marital TrustsCan be a problem

Terms of trust will determine if there is a problem

Review trust to see if the trust can be terminated

VA will look at control

Credit Shelter TrustsVA general counsel opinion 33-97 may

cause trust assets to be counted

Trust that would not be countable asset for Medicaid may be countable for VA purposes

VA will look at control

SummaryThis is not an all encompassing list. If you are going to work in this area you need to become proficient in income taxes and develop a thorough understanding of all types of assets.

Questions ?

Thank You!