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VA Pension Planning – An Overview Part 2

In our recent post, VA Pension Planning – An Overview Part 1, we discussed the service and medical eligibility requirements. Here we will focus on the Means Test of financial eligibility for VA Pension. The Means Test is comprised of Income for VA Purposes, or IVAP, and Net Worth. We will discuss the requirements for both, and some possible options of pre-planning to meet those requirements.

, VA Pension Planning – An Overview Part 2Income for VA Purposes (IVAP)

Income for VA purposes is the gross household income minus unreimbursed medical expenses. The household is considered to be the veteran and the spouse as well as any dependent children. Dependent children, according to the VA, are children who were so disabled they could not provide for themselves prior to the age of eighteen, and the disability continued into adulthood. If the claim is being filed for a surviving spouse, then the household would just be the surviving spouse and any dependent children.

There are three types of income that the VA acknowledges: one-time income, recurring income, and irregular income. One-time income is typically a lump sum receipt such as an inheritance or gift, and one-time income can be received more than once a year. Recurring income is any income received on a regular basis AND in regular amounts, such as: wages, social security, retirement pension, social security disability (SSDI), required minimum distributions, and annuities. Irregular income is income received several times a year, but at irregular times OR irregular amounts, such as: dividends and interest, which includes all interest, even if it is just pennies.

If the veteran and their spouse, or a surviving spouse, have out of pocket medical expenses that equal or exceed their income, they will qualify for the maximum benefit. For example, if Tom and Louise have $3,000 a month in income, and pay $6,000 a month for nursing care, then their income is $-3,000 a month, which is $0 IVAP. If their income is $6,100 a month, then their IVAP would be $100. They would still qualify for pension benefits, but their benefit would be reduced by $100 a month. There are several exclusions to income, but the biggest exclusion is unreimbursed medical expenses.

Unreimbursed Medical Expenses (UMEs)

Unreimbursed medical expenses must be actually paid out of pocket and not reimbursed by another source. If the medical expenses are regularly recurring, then they can be projected on the Pension application. If they are not regularly recurring, then they cannot be put on the application until after the expense has been paid out of pocket. The claims application process is set up for this, and once you apply, you have twelve months to submit all of your paid UMEs and have your IVAP recalculated.

UMEs are subject to a 5% deductible, meaning if you have $10,000 in UMEs, you must deduct 5%, $500, and your UMEs used for IVAP are $9,500. Examples of UMEs are medical insurance premiums (NOT life insurance), incontinence supplies, prescriptions, caregivers and / or facilities so long as they are primarily for custodial care. Unfortunately, co-pays for doctor appointments are not UMEs; however, they can be used in the recalculation of IVAP after they have been paid.

Strategies for Reducing IVAP

There are three main strategies for reducing IVAP: reducing income, increasing UMEs, and “Apply and Wait”. Reducing income can mean reinvesting assets so they produce less, or even no income. Income producing assets can also be transferred to someone else, although there is a look back period and penalties if this is not done correctly. This will be discussed further below.

Increasing UMEs can include increases services at a skilled nursing facility, paying for more care at an assisted living facility, increasing caregiver hours, or paying an adult child who is already providing care. Again, as long as the primary type of care is custodial care, meaning assistance with activities of daily living, this would qualify.

“Apply and Wait” is a strategy that we touched on above. This means that the claimant applies, and then has twelve months to build up non-regularly recurring medical expenses and resubmit their claim to the VA updating the UMEs. The common non-regularly recurring medical expenses to keep track of are prescriptions, co-pays, medical equipment or supplies, dental work, hearing aids, and glasses. Some of those items such as prescriptions or medical equipment may be considered regularly recurring AND non-regularly recurring, the regularity of the payment made is what the categorization is based on. If you pay monthly for oxygen tanks, then it would be regularly recurring, but if you paid a one time payment for the oxygen pump, then it is not regularly recurring.

Net Worth

Net worth is the maximum allowance of countable assets a veteran and their spouse, or a surviving spouse, is allowed to have and still qualify for VA Pension. It includes assets and income, which is an annual amount added onto the assets. The 2019 maximum allowance is $127,061 and it will rise each year with the Social Security Cost of Living Allowance. The net worth includes the assets of the veteran, spouse, and any dependent adult children. If an asset is producing income, it would be considered both income and an asset. For example, the balance of an IRA is an asset, and the required minimum distributions would be considered income.

There are exempt assets that claimants are allowed to have without impacting their eligibility for VA Pension. These include:

  • A primary residence with a reasonable lot area – no more than 2 acres, unless the acreage is unmarketable. The veteran does not need to live at the primary residence for the exemption to apply, the veteran could be a nursing home.
  • Personal effects, including household vehicles. Important to note that more than one car is ok!
  • Assets in some irrevocable trusts, as long as certain requirements are met, including making sure that no income is being distributed to the veteran or their spouse.

Assets in a revocable or living trust are still counted as assets because and payments made from an irrevocable or special needs trust are considered income.

Reducing Assets and Pre-planning

The easiest and safest way to reduce your net worth is to spend it! Take a vacation, upgrade the family vehicles, do house repairs or remodels, or buy a house if you don’t own one, pay off debt, purchase goods and services for any member of your household, even if they are not a dependent adult. You can create a lump sum caregiver agreement; however, that cannot be used as an UME. You can also get dental work done, prepay funeral arrangements, and pay legal fees.

Another way to reduce your net worth is to transfer your assets away using pre-planning tools. This should be done with an accredited attorney to avoid costly mistakes. The reason you should pre-plan is because there is a penalty on all transfers of covered assets with a 36-month period just before the application date.

Covered assets are any assets over that $127,061 (maximum allowance). And the penalty is not a monetary fine, but a penalty of time, meaning your eligibility is delayed. The penalty is calculated by taking the amount of the covered assets that were transferred within the 36-month lookback period and dividing it by the highest Maximum Annual Pension Rate (MAPR), which is currently $2,230 for 2019 for a married veteran qualifying for Aid and Attendance. The result is rounded down, and is the number of months of ineligibility.

For example:

Tom and Louise own a home, three cars, have a checking and savings account of $150,000. Tom has an IRA worth $50,000 and Louise has a 401k worth $200,000. They have a combined income of $27,061 a year. They decide to give $100,000 to each of their three daughters on October 1, 2019 and want to apply for VA Pension. Now what?

The house and cars are all exempt assets. They have $400,000 and $27,061 in income, so $426,061. They are allowed to have $127,061, which leaves them with $300,000 in covered assets. They gifted that $300,000. The penalty, is the gift of $300,000 divided by the MAPR, $2,230, which equals 134 months. The cap on the penalty is 5 year, so here, the 134 months is over 5 years, so the penalty will be 5 years. Tom and Louise can apply, but they will not be eligible for VA Pension until November of 2024.

It is imperative to seek an accredited attorney who can assist with VA Pension planning to avoid heavy penalties when you really need the assistance immediately. Good pre-planning can avoid all of the hassle of last-minute scramble and shuffling of assets to qualify for benefits.

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