Proposed VA Asset Transfer Regulations Will Change
Our Approach To Planning
Gene L. Osofsky, Esq.
On January 23, 2015, the Department Of Veterans Affairs issued proposed regulations which would make significant changes to the determination of Net Worth, the treatment of pre-application Asset Transfers, and the deductibility of medical expenses in determining countable income.1 To the extent these become final, they will dramatically impact planning strategies that advocates have long used to help veterans and their surviving spouses qualify for pension. Likewise, they will also impact both Medi-Cal planning and potentially even garden-variety estate planning.
Veterans’ advocates question whether the proposed regulations are grounded in statutory authority and court challenges on that basis are anticipated.2 Pending those challenges, this article raises alerts for advocates considering asset transfers to help veterans qualify for pension.
The Proposed Regulations & The Presumption
It appears that the primary purpose of the proposed regulations was to “reduce opportunities for attorneys and financial advisors to take advantage of pension claimants” by advising asset transfers and the restructuring of assets in order to qualify for pension. While ostensibly designed to prevent this perceived overreach by advisors, the regulations would instead severely punish deserving veterans and their dependents.
In its proposed regulations, the VA proposes harsh new rules to penalize asset transfers made within 36 months of application. This proposal represents a sea-change for the VA. Historically, asset transfers made prior to application were perfectly fine, providing that the transfers were made to a person who was not a part of the veteran’s household, and where the veteran maintained no ownership, dominion or control of the transferred assets.
By contrast, the proposed regulations would now create a very difficult to rebut presumption that uncompensated asset transfers made during the 36 month pre-application “look back” period prior to application were made to establish pension entitlement. They would establish a penalty period of up to 10 years for claimants who transferred assets for less than fair market value to qualify. The penalty period would be calculated based on the uncompensated value of assets transferred during the look back period to the extent the transferred assets would have otherwise caused the Veteran’s Net Worth to exceed the applicable Net Worth ceiling. These “excess assets” are called “covered assets” in the proposed regulations. Exception: no penalty attaches to assets transferred to a trust created exclusively for a child of the veteran incapable of self-support, whose disability began before age 18. 38 CFR § 3.276(d).
Asset Transfer Penalty: the Bad News
The penalty for the transfer of covered assets would be determined as follows: the value of covered assets transferred during the look back period would be divided by the applicable monthly pension rate for Aid and Attendance at the time of the VA pension claim, and then rounded down to the nearest whole number. That number would then be the number of months of disqualification. 38 CFR §3.276(e).
Assuming $100,000 in covered assets were transferred during the look-back period, the penalty period would be calculated as follows if a claim were made in 2015:
Married Veteran: $100,000 / $2,120 = 47 months
Single Veteran: $100,000 / $1,788 = 55 months
Surviving Spouse: $100,000 / $1,149 = 87 months
In essence, the duration of the penalty would depend upon the marital status of the claimant and the applicable monthly Aid and Attendance rate at the time of application. 38 CFR § 3.276(e)(1). In this regard, note that the transfer penalty for a surviving spouse would be approximately double what it would be for a married veteran.
Net Worth and Treatment of the Home: Some Qualified Good News
The regulations propose a “bright line” test for determining Net Worth by anchoring the determination to the Medicaid rules. Under the proposed regulations, Net Worth would be the sum of the following: (1) the maximum Community Spouse Resource Allowance (currently, $119,220 for 2015), annually indexed for inflation, plus (2) the amount of the Veteran’s annual household income. It appears that this “bright line” would apply both to a single veteran as well as to a married veteran. On its face, this use of the maximum CSRA as the “bright line” Net Worth ceiling would bring more predictability to adjudications of Net Worth. However, adding annual income to the tally of Net Worth would effectively reduce the CSRA ceiling.
Further, this proposed ceiling would foreclose exceptions for veterans with high expenses for care who would likely consume all their savings before end of life.
The other bit of qualified good news is the proposed treatment of the home. In current practice, and notwithstanding the absence of statutory or regulatory authority, advocates report that some VA adjudicators include the home in Net Worth if the veteran has moved out of the home to a care facility and rents out his home. Under the proposed rules, the home – up to a 2 acre lot area –would not be counted as an asset even if the claimant resides outside the home in order to receive care. 3.275(b)(ii). By inference, a gift transfer of the home would presumably not trigger a transfer penalty as it would not be deemed an asset for Net Worth purposes, although the regulations do not expressly so state. However, if the home were sold, the proceeds would be treated as an asset, except to the extent they were “used to purchase another residence within the same calendar year”. 38 CFR §3.275(b)(1) [emphasis added].
“Take-Aways” and Planning Considerations
1. The Focus Of Divestment Planning Would Be on the VA Pension Program, Rather Than on the Medi-Cal Program:
Heretofore, when advocates considered asset transfers for a veteran faced with long-term care, the focus had been entirely upon the Medi-Cal rules, rather than upon the VA pension rules. Reason: Asset transfers under the Medi-Cal program triggered penalty periods, while asset transfers under the VA Pension program did not. Thus, asset transfers made in compliance with the Medi-Cal program were necessarily compliant with the VA pension program.
Now, under the proposed regulations, that approach would be turned on its head: both programs would penalize asset transfers, but the potential period of disqualification under the VA pension program would be much longer. Reason: the penalty divisor under VA program would be much smaller than the Medi-Cal penalty divisor, resulting in a longer period of disqualification for VA Pension claimants. Further, the penalty could extend up to 10 years under the VA program, while it is currently capped at 30 months under the Medi-Cal program.
Thus, under the proposed new regulations, Veterans who opt for Medi-Cal planning may need to forego application for a VA Pension, at least during the 36 month look-back period.
2. The Effective Date of the Proposed Regulations Is Unknown: Retroactive?
The regulations do not set a date as to when they would become effective. Could they be retroactive to some date earlier than the date of the Final Regulations? Advocates should, even now, be wary of advising asset transfers to qualify for VA pension until that effective date is known.
3. The Proposed Regulations Do Not Grandfather Existing Claims or Transfers
There is no provision in the proposed regulations to grandfather existing claims, and - - absent clarity on that point -- there is some concern that claimants who currently receive pension, and who previously participated in pre-application asset transfers in compliance with then existing rules, could have their claims re-determined under the proposed new rules. Further, there is no “phase-in” with regard to pre-application asset transfers as there likely will be for Medi-Cal eligibility when the Deficit Reduction Act is implemented in California.
4. The Purchase of an Annuity Would Be Considered an Uncompensated Transfer.
The proposed regulations do not recognize that a lump-sum single premium used to purchase an annuity is a purchase for value, i.e. a lump sum payment in exchange for a stream of payments. Instead, they treat the entire premium as an uncompensated transfer. 38 CFR § 3.276(a)(6). This treatment would seem to eliminate the use of annuities as a means to reduce excess assets to meet Net Worth limitations, at least if purchased within the “look-back” period. Further, to the extent that the purchase of an annuity might be considered appropriate for Medi-Cal planning, it would have potentially adverse implications for a client also considering application for VA pension.
5. Transfers to Any Trust Would Be Deemed an Uncompensated Transfer
Except as noted below, the proposed regulations treat the transfer to any trust as an uncompensated transfer. 38 CFR § 3.276(a)(6). This is especially problematic as they do not distinguish between an irrevocable trust, on the one hand, and a revocable trust, on the other. This failure to distinguish one trust from the other is, again, a trap for the unwary. As presently formulated, a veteran who creates and funds a garden-variety Living Trust within 36 months of application could run afoul of the transfer provisions.
Exception: no penalty attaches to assets transferred to a trust created exclusively for a child of the veteran incapable of self-support, whose disability began before age 18. 38 CFR § 3.276(d).
6. Transfers Would Be Aggregated and the Penalty Start Date May Be Deferred
For purposes of calculating the penalty, the proposed regulations appear to aggregate all uncompensated transfers made within the 36 month pre-application look-back period. Further, they provide that if the claimant made more than one transfer during that period, the penalty would not begin to run until the 1st day of the month following the date of the last transfer. 38 CFR § 3.276(e)(2). This treatment creates a longer period of disqualification and differs from the way Medi-Cal currently treats asset transfers (i.e., as running from the date of each individual transfer).
7. No Partial Cures; Narrow Window to Cure
The current regulations require that all of the covered assets must be returned in order to avoid the position of a penalty. 38 CFR § 3.276(e)(5). Notably, there is no provision for a reduction in penalty based upon a partial return of assets. Thus, if the gift recipient has spent some or all of the gifted assets and cannot return 100% of them to the veteran, the veteran will incur a full penalty period.
8. Narrow Window to Reverse Gift Transfers; Trap for the Unwary.
A transfer penalty could only be avoided if all of the transferred assets were returned back to the claimant before filing the claim or within 30 days of filing and evidence of such return is provided to the VA within 60 3 days of the VA’s advice of its intention to impose a penalty. This 30 day window is a trap for the unwary: the veteran may have long since forgotten about the transfer and/or may not know that it is subject to a penalty calculation until he is later so advised and it is then long past the 30 day cure window. Further, if the effective date of the regulations is anchored to the time of application without grand-fathering prior transfers, veterans who made lawful, uncompensated transfers under prior law would be heavily penalized when they later apply for pension.
9. DRA Type Bridging Techniques Won’t Work for Pension
While the proposed VA regulations are, in part, anchored to the Medicaid rules, many accepted Medicaid strategies will not work to qualify for pension. Example: Medicaid applicants in states already operating under the Deficit Reduction Act (“DRA”) sometimes bridge the penalty period by purchasing a DRA compliant annuity or arranging an intra-family installment loan to cover care expenses during the penalty period. This DRA bridging technique is unlikely to work in the context of pension: the purchase of an annuity to reduce Net Worth, in and of itself, would be treated as a prohibited transfer, and the installment note would likely be valued as an asset in the calculation of Net Worth.
10. No Hardship Provisions to Rebut the Presumption
The ability to rebut the presumption is extremely limited. The veteran could only rebut the presumption that the transfer was for the purpose of decreasing Net Worth if the veteran,
“..establishes through clear and convincing evidence that he or she transferred the asset as the result of fraud, misrepresentation, or unfair business practice related to the sale or marketing of financial products or services for purposes of establishing entitlement to VA pension.”
This limited exception exposes the harsh penalty calculation to even innocent transfers made for a purpose other than to qualify for pension, e.g. to help with wedding expenses, college education, birthday gifts, and contributions to charity and church. Veterans could be required to produce 36 months of financial statements to prove the absence of disqualifying transfers.
11. Marital Status at the Time of Claim, Not At Divestment, Determines the Penalty Calculation
The application of the penalty calculations can lead to skewed results, in this sense: if the transfers were made while the veteran was married, the penalty divisor would be $2,120 (Aid and Attendance for a married veteran in 2015), but if the veteran later dies and application for pension is made by his surviving spouse, the penalty divisor would only be $1,149 (Aid and Attendance for a Surviving Spouse in 2015). The smaller the divisor, the longer the penalty period. Advocates question whether this disparate treatment makes sense, even in the context of the avowed purpose of discouraging uncompensated transfers during the look-back period.
Even now, because of the lack of clarity regarding the effective date of the proposed changes, advocates should be extremely cautious about continuing to advocate the use divestment strategies to help claimants qualify for VA pension. Further, where veterans have already made uncompensated transfers within the prior 36 months, advocates should consider advising them to defer application for pension to a date more than 36 months after the last such transfer. They should also advise that divestment strategies used for Medi-Cal planning may adversely impact eligibility for pension. Likewise, the purchase of annuities should no longer be viewed as a tool to reduce Net Worth. Further, veterans and/or their spouses who choose to create “Living Trusts” should be advised of the potential implications of these devices should they seek a VA pension within 36 months of funding.
Even under the proposed regulations, there is still a place for VA pension planning. However, to the extent that planning is focused upon reducing Net Worth, it will now become a more proactive undertaking in that it will need to be completed more than 36 months before application.
Lastly, for those who wish to comment on the proposed regulations, the deadline is March 24, 2015 4.
(Gene L. Osofsky, Esq., is a sole practitioner in Hayward, California. The author wishes to thank Bradley S. Erdosi, Esq., for reviewing a draft of this article.)
1. Federal Register, Volume 80, Number 15, Part IV. The amendments propose to amend 38 CFR §’s 3.261 -- 3.551.
2. Two prior reform bills in Congress died in committee. The VA’s proposed regulations, while prompted by recommendations made by the Government Accountability Office (GAO, ignore the GAO’s own specific recommendation that the VA obtain clear statutory authority from Congress to establish “a look back and penalty period” similar to other means tested programs. GAO, “Report to Congressional Requesters; VETERANS PENSION BENEFITS: Improvements Needed to Ensure Only Qualified Veterans and Survivors Receive Benefits”, at page 22. Advocates also argue that the proposed regulations are “arbitrary and capricious”.
3. There seems to be an error in the proposed regulations. The explanatory comment preceding the regulations refers to a 90 day period (at page 3849), while the proposed regulations, themselves, provide for a 60 day period. (Page 3961 at 38 CFR §3.276(e)(5)(ii)).
4. Comments may be submitted via email to http://regulations.gov. They should reference that they are in response to RIN-2900-AO73, “Net Worth, Asset Transfers, and Income Exclusions for Needs-Based Benefits”.