Irrevocable Life Insurance Trust VA Aid and Attendance Pension Benefit FAQs

Question: My dad converted his residence to a rental house, and the house is subject to mortgages. What is the impact on his application?

Answer: Residence is an exemption asset for the Net Worth analysis, but a rental house is an available asset for the Net Worth analysis. However, the amount of mortgages will be deducted from the value of the house for the Net Worth analysis.

Question: Dad also has rental income from this rental house. What is the impact of that on the income analysis?

Answer: Rental income from the house is available income. However, reasonable operating expenses can be deducted from gross income.

Specific Deductions:

  • Amounts expended on supplies which are consumed in the course of the business are deductible.
  • If rental or business property is mortgaged, payments of interest on the mortgage are deductible from business or rental income; however, payments of principal are not deductible.

Question: Can a trust be used to reduce the size of assets?

Answer: Yes. There are a few kinds of trust that can be used for Pension benefit asset protection planning. However, you must work with an attorney who has knowledge of Federal trust law, State trust law, tax law, VA rules and Medicaid law. For example, even the issue of determining who is to become trustee of the trust takes a very complex legal analysis, and making a wrong determination will disqualify the veteran for the VA pension benefit or/and possible future Medicaid eligibility. You really need to talk to a trust lawyer who practices this area of law in your state.

Question: Can the home care expenses be deducted as un-reimbursed medical expenses from the gross income to calculate the Income for Veterans Affairs Purposes ?

Answer: If the home care is provided free, the expenses cannot be deducted to calculate the Income for Veterans Affairs purposes. However, if there are a bills, receipts, bank statements which show the amount paid and the date on which the payment is made, home care expenses can be deducted as un-reimbursed medical expenses. Also, you should get the doctor’s letter to explain that the veteran needs home care.

Question: Can anyone be the care giver in order to get the home care expenses be deducted as un-reimbursed medical expenses?

Answer: If the veteran receiving the home care has not been rated in need of Aid and Attendance or Housebound, the caregiver must be a licensed health care professional in order to deduct the wages as Un-reimbursed Medical Expenses. However, if the veteran receiving the home care has been rated in need of Aid and Attendance or Housebound, wages paid to the caregiver is deductible medical expense and the care giver does not have to be a licensed health care professional. Such a caregiver can be a family member.

Question: Can I just retain Life Estate of my property, transfer the remainder interest to my son (who does not live with me), and reduce the Net Worth of my assets for VA purposes? I know this works for Medicaid purposes.

Answer: No, it does not work for VA pension purposes. If you retain life estate and transfer the remainder interest of the property, the transfer is disregarded for VA purposes. VA interprets that you still retain exclusive right and control of the property.

Question: What is VA Pension Benefit Asset Protection Trust?

Answer: I will briefly explain one of the Asset Protection Trusts that I use for VA Pension Benefit Planning. It is called Intentionally Defective Grantor Trust (IDGT). IDGT is a trust that treats the assets in the trust differently for income tax purposes than for estate tax and gift tax purposes. The veteran will be the grantor but not a beneficiary.

This trust will take advantage of the Internal Revenue Code Sections 671-677, and takes advantage of the differential tax treatment for income tax purposes. For most veterans, the major asset in this trust is the residence. If the veteran owns the residence as an individual and sells it, then the proceeds will be part of the veteran’s Net Worth and will disqualify the veteran for the VA Pension Benefit. However, if the residence is in the trust and sold by the trustee of the trust, the proceeds from the sale of the house is not imputed to the veteran by VA. By transferring the residence to the IDGT, the veteran has already transferred the asset for VA purposes and it is not part of his Net Worth any more. Also, by transferring the residence and some other assets to this trust, the veteran has started to run the 5 year look back period for Medicaid purposes. If the veteran gets on Medicaid in the future (more than 5 years later), the assets in the trust are not subject to the state estate recovery under Washington Law.

The veteran is a grantor but not a beneficiary. Perhaps, the veteran’s children or friends can be the beneficiaries. The trust agreement provides rights and duties of the trustee so that trustee can make discretionary distributions to the beneficiaries. It is better for the trust agreement not to provide any mandatory distribution language for beneficiaries. The distribution standard should be totally discretionary. Also, it is recommended that the trust agreement provides for the Trust Protector which has an absolute power to remove and replace Trustee at its discretion. With this mechanism, trustee can withhold distributions to any beneficiary that does not enhance the goal of the veteran’s asset protection planning. Also, the trust protector can remove any trustee which does not enhance the goal of the grantor’s asset protection planning, and it can replace with another trustee which will be more sympathetic to the grantor’s asset protection planning. By establishing this trust, the veteran can have a more control over how the assets in the trust are going to be distributed and used, although the veteran himself/herself has no legal control over the trust assets.

Some Advantages of IDGT:

  • The trust can hold and sell a veteran’s residence, and keep the proceeds. The proceeds will not disqualify the veteran for VA pension or Medicaid during the lifetime of the veteran;
  • Proceeds for the sale of the residence are not subject to estate recovery by the Medicaid Agency;
  • Trustee of the trust can sell the residence and still take advantage of Internal Revenue Code Section 121 capital gain exemption up to $250,000;
  • At the death of the grantor, the trust assets will receive a step-up in basis for income tax purposes;
  • It will keep the assets out of the hands of irresponsible children. It is said that the average length of period that children will keep the assets received from their parents is 18 months. This trust will prevent irresponsible children from using up all the assets if the parent transfers them directly to them;
  • Claimant can ascertain trough the power of trustee, trust protector, and with skillfully drafted trust provisions, that responsible and caring children get more distributions of assets than those who are not. We know from our experience that good caring children will use the money for good causes, such as spending money for their good parents, right?!

However, this trust requires drafting attorneys to have high-level knowledge of trust law (both federal and state), tax law, and VA and Medicaid law. Having a bad provision in a trust agreement is fatal. Please consult an attorney who practices in these areas of law in your state.

Question: I know a 1st party Special Needs Trust is not considered available resources for Medicaid. Does VA take the same approach?

Answer: I think the answer is NO, although there might be a split in the opinions among attorneys. In my legal analysis, VAOPGCPREC 33-97 explicitly answered this question. It held that assets transferred by a claimant or its fiduciary to a Special Needs Trust, which is designed to preserve the assets by restricting trust expenditures to the claimant’s “special needs”, while maximizing the use of governmental resources in the care and maintenance of the claimant should be included in the claimant’s Net Worth analysis as available assets. If properly drafted and implemented, the above mentioned IDGT is much safer for VA purposes.

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category: VA Aid and Attendance

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