The first article in a series reviewing the Impact of the NEW VA Regulations on Aid & Attendance
In January 2015, the Department of Veterans Affairs (the "VA") published proposed regulations amending eligibility requirements for its needs-based programs, including the veteran's aid and attendance pension benefit for veterans and their surviving spouses (referred to herein as the "Aid & Attendance pension benefit"). The VA reports that it received over 850 comments to the proposed regulations during the public comment period, which ended in late March 2015. Since then we have been waiting to learn to what extent the VA would make changes to those proposed regulations, unsure whether the final regulations would impact clients' applications that were in process when the final regulations were finally published. The final regulations were published on September 18, and are effective as of October 18, 2018. For professionals who work with veterans, their surviving spouses and families, the final regulations bring significant changes to the considerations that bear on their planning for such individuals.
The final regulations made major changes in three areas that will impact planning for the Aid & Attendance pension benefit: the calculation of net worth, an expansion of the types of expenses which can be taken as unreimbursed medical deductions from income, and the imposition of a three-year look back period for certain transfers, and penalties for such transfers. I will discuss each change in detail over the course of three installments. It should be noted that some changes to the proposed regulations may well be very favorable for claimants notwithstanding the new penalty for certain transfers. This post will concentrate on the new net worth regulations, because the transfer rules really cannot be understood without first comprehending the net worth rules. (Unless otherwise noted, all section references are to 38 C.F.R., Part 3.)
A major change in the regulations is the definition of the "net worth limit" and clarification of how net worth is calculated. In the past, measuring net worth in relation to eligibility for pension was a nebulous process which left much discretion in the hands of individual adjudicators who considered life expectancy, projected rates of depletion of assets and other factors. Planners were left to work with rules of thumb in connection with the value of assets a veteran or surviving spouse could retain and still be eligible for pension.
Now, the VA regulations establish a bright line rule – pension will be denied if the claimant's net worth exceeds the net worth limit. §3.274(b). The net worth limit is equal to the current maximum community spouse resource allowance (CSRA) from Medicaid - $123,600 - and will be adjusted by the same percentage as Social Security is adjusted for cost-of-living adjustments whenever those are made. §3.274(a). The bright line rule should make it easier for veterans and their families to understand pension eligibility. In addition, it may allow more veterans and their spouses to qualify for pension without transferring assets, creating trusts or buying investments they do not necessarily understand. Be aware that this net worth limit applies regardless of whether the claimant is married, has dependents or is single.
Net worth is calculated as the sum of the claimant's assets and annual income. §3.274(b)(1). For these purposes, a veteran's assets include the assets of both the veteran and the veteran's spouse and the assets of a veteran's surviving spouse include only his or her assets. §3.274(c). Income is calculated with some exclusions detailed in §3.271 and includes deemed income of dependents, including the spouse and certain dependent children. §3.274(b)(3).
Assets are defined as the fair market value of all property owned by the individual, including all real and personal property, unless specifically excluded, less the amount(s) of mortgages or other encumbrances specific to the mortgaged or encumbered property. §3.275(a). As an example, the mortgage on a rental property would be deductible from the value of assets, but general credit card debt would not. Although there are several specific exclusions from assets, the two with the broadest application are likely: i) the primary residence and ii) personal effects "suitable and consistent with a reasonable mode of life, such as appliances and family transportation vehicles". §3.275(b). Interestingly, prior VA policy had been to exclude the value of only one vehicle; however, the language of the new regulation which specifically references "family transportation vehicles" may require the VA to revisit this policy.
The value of the claimant's primary residence in which the claimant has an ownership interest, including the residential lot area (limited to 2 acres unless the additional acreage is not marketable), is excluded as an asset. §3.275(a)(3). However, any mortgage on the primary residence will not be a reduction in value of the claimant's assets. The value of the primary residence will be excluded even if the claimant actually resides in a nursing home or medical foster home, a care facility other than a nursing home or the home of a family member for health care or custodial care. §3.275(b). Not only does this rule allow flexibility to veterans in how and where they receive care, but it also presents a potential planning opportunity for veterans to purchase a life estate in the home of a child and still move into an assisted living or other care facility. The value of the life estate is an excluded asset and the purchase of the life estate should avoid the asset transfer rules if purchased for fair market value. Furthermore, if the claimant lives in the residence for at least a year after purchase, the purchase will also avoid Medicaid transfer penalties. 42 U.S.C. §1396p(c)(1)(J). It should be noted that the VA has specifically reserved the issue of how life estates should be valued. In the absence of clarification from the VA, it is probably best to use current IRS methodology for valuing life estates.
The Supplementary Information accompanying the new regulations states that claimants will not be required to sell the residential lot in excess of 2 acres. Instead, the VA will simply add the value of the additional property in the asset calculation. Therefore, it will be important for advisors to obtain proof of the value of the additional acreage or proof of its unmarketability, such as inspections, appraisals, public records and the market value of similar property.
There are additional rules in place regarding the sale of the claimant's primary residence after eligibility for pension is established. The net proceeds of such a sale are included in assets unless such proceeds are reinvested in a new primary residence for the claimant within the calendar year of the sale. This is a result of the application of 38 U.S.C. 5112(b)(4) which requires that the effective date of changes in pension as a result of a change in the "corpus of estate" shall be the last day of the calendar year in which the change occurred. On the other hand, if the proceeds are spent down below the net worth limit before the end of the calendar year, the VA will not reduce pension on the basis of excessive net worth. §3.274(h)(2). This rule puts a practical burden on veterans who sell a primary residence at the end of the calendar year. Most clients would likely be well served to delay a December closing to January in order to provide ample time to purchase and close on a new primary residence.
The regulations also include a definition of how net worth decreases: Net worth decreases as a result of asset decrease, annual income decrease or both annual income and asset decrease. §3.274(f). Assets can decrease by spending assets on items and services for which fair market value is received and which are not also items included in net worth. Allowable expenses and services can be those of the veteran, the veteran's spouse or of a relative of the veteran or spouse who is a member (or constructive member) of the veteran's or spouse's household.1 The Supplementary Information (p.47250) makes the point that, in general, the VA does not require receipts or other proof of purchase to show decreased assets, although it is permitted to request them. The point is reiterated in the Supplementary Information (pp. 47255-47256) in the discussion of the impact the look-back period on delays in processing and hardship if claimants had to provide 3 years' worth of bank statements and other documentation. But it should be noted that the VA will use matching programs with other government agencies (notably the IRS and Social Security) "to determine whether an asset transfer constituted transfer of a covered asset." (The definition of a covered asset will be discussed in more detail in the next installment in connection with asset transfers.) To the extent that claimants are spending more than their income on everyday expenditures for themselves or the members of their household, there may be a greater risk that the VA will ask them to document the expenditures. For claimants whose net worth is close to the net worth limit and who may be contemplating an asset transfer, it may be worthwhile to document that net worth decreased below the net worth limit as a result of expenditures before a transfer is made. (This relates to the concept of a "covered asset" which will be discussed next time.) Purchasing a new car, taking a special vacation, deferred maintenance on the primary residence could be suitable large expenditures for such purposes.
Income can be decreased by reasonably predictable unreimbursed medical expenses to the extent that they exceed 5% of the maximum annual pension rate ("MAPR") in effect on the date of application for the pension claim. The rate to be used is the aid and attendance level for a veteran with one dependent, regardless of the type of claimant (veteran, surviving spouse or veteran with dependents). Notably the new regulations provide an expanded definition of medical expenses that may be deducted, which may allow many veterans to reduce income to zero. §3.272(b). I am going to discuss the medical deductions in more detail in the third installment of this blog.
In the next installment, I will discuss the new look-back period and transfer penalties.
1 The term "member of household" is not defined in the regulations; however, in the proposed regulations, §3.278(b)(5) a "qualified relative" was defined as veteran's dependent spouse, dependent or surviving child, and other relatives of the claimant who are members or constructive members of the claimant's household whose medical expenses are deductible under §§3.262(l) or 3.272(g). These sections refer to persons who are the veteran, the spouse, children, parents or other relatives for whom there is a moral or legal obligation of support. A constructive member of the household is a person who would be a member of the household if not in a nursing home, away at school or in a similar situation. The definitions of qualified relatives and constructive member of the household were removed from the final regulations. The reference to this phrase in the final regulations is likely an oversight and probably should be considered to refer to the proposed definition unless the VA publishes clarification.
Elizabeth ("Beth") Boehmcke, Esq.
Attorney, Content Specialist, InterActive Legal
Elizabeth (“Beth”) Boehmcke graduated cum laude from the University of Michigan Law School in 1993. After graduation from law school through 2003, she specialized in high net worth estate planning, with an emphasis on cross-border and asset protection planning, and the representation of fiduciaries managing complex trusts and family businesses.
During her career in New York, she was an associate attorney at both Rogers & Wells (now Clifford Chance) and Hodgson Russ in New York City. After a hiatus in her legal career to care for her children, she resumed her legal career by passing the Virginia bar in 2014 and began working for the Hook Law Center, P.C., where she expanded her estate planning practice to include elder law, specifically focusing on asset protection planning for Medicaid and Veteran’s benefits.
She is a proud graduate of the University of Virginia where she received a B.A. with distinction in Psychology in 1988 and is also a graduate of SUNY-Buffalo where she received an M.A. in Clinical Psychology in 1990.