The VA Pension benefit is available to veterans who have served during a period of war as defined by Congress, who meet certain income and asset limits, and who meet certain disability or medical thresholds. On January 23, 2015, the Veterans Administration (VA) published a comprehensive rule that would amend 38 CFR Part 3. Part 3, which involves changes to several sections, covers net worth, asset transfers, and income exclusions for needs-based benefits. The stated objective is to respond to the GAO and to maintain the integrity of the system.
It seems clear from the proposed changes that maintaining the integrity of the system really means closing “loop-holes” and reducing veterans’ short-term access to benefits. The amount a veteran could ultimately receive is not changing, but the path to get there is harder and longer.
So, how will the VA approach this change? In this set of proposed rules (if they become law as written), it will be met through changes to net worth and income thresholds, reductions in use of asset transfer approaches, and changes to the way medical expenses can reduce the net income.
Limitations on Net Worth
Proposed rule 38 CFR § 3.274 would impose a limit on net worth which is a hybrid of the processes used by the VA and by Medicaid. This new net worth limit is equal to the maximum community spouse resource allowance for Medicaid purposes on the effective date. To this is added annual income, so every dollar of annual income is now added to the asset levels, even though veterans and their spouses clearly have to actually *spend* the income they receive to survive. Recognizing this, the proposed rules then deduct certain expenses from the asset amount, similar to the method used today to compute the “income for VA purposes.” This procedure is explained and demonstrated in 38 CFR §3.274(f)(5). The numbers seem to all be based on year-end information. The primary residence is still excluded, even if the claimant is not residing there, but personal mortgages on the property are not considered.
Changes to Asset Transfers
Proposed rule 38 CFR § 3.276 addresses the transfer rules and penalty periods that would be imposed for transfers made prior to applying for VA pension. Significantly, the VA will impose penalties on all transfers to qualify. Today, some veterans are able to irrevocably give assets to family members, transfer assets to a trust, or purchase income-producing annuities with assets in order to reduce asset levels to qualify. Under the new rules, NONE of these methods will be suitable for planning. Further, the look-back period for such transfers is 36 months. Returning the assets transferred will remove the penalty if returned within one month of application. The penalty is not based on the cost of care (as used by Medicaid) but on the expected pension rate, and can last for as long as ten years. Even more onerous, the penalties are added and then applied as of the most recent transfer date.
One exception to the asset transfer rules are for a transfer by a veteran or spouse to an irrevocable trust established on behalf of a child (e.g., a “special needs trust”). This will only work under specific conditions.
Under proposed rule 38 CFR § 3.278(c), medical expenses for VA purposes are those that are “medically necessary or that improve a disabled individual’s functioning.” These are similar to allowed expenses under the current rules. Caregiver costs may be deducted only for licensed providers and only for support for ADLs (basic self-care activities … bathing or showering, dressing, eating, toileting, and transferring), but if rated “Housebound” or “Aid & Attendance” then a more liberal set of caregivers and services may be provided (independent living activities, such as shopping, food preparation, housekeeping, laundering, managing finances, handling medications, using the telephone, and transportation for non-medical purposes). Certain eligible family members can provide care (and be compensated) if care is prescribed by a physician. Rates for care givers must be under the rates published in the MetLife Mature Market Institute Market Survey of Long-Term Care costs.
This seems to expand the services available that can be used to reduce income as compared to the current rules. Independent living facility costs are still not covered.
The Effect on Planning for Pension
The new rules are harsh, in particular around the penalty periods. The presumption that all transfers are made with the intent to qualify for Pension might mean that ALL gifts for family birthdays, Christmas, travel, and so on will be countable and penalized. Consequently, proper planning and record-keeping is critical. If these rules become law, many veterans who could have received benefits immediately will be unable to apply for several years.
If you have questions, please refer to these resources, or stop in to ask us directly:
The proposed rules