Excess Asset Management
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Excess Asset Management
James (Jim) Swain, JDFounder and CEO of the
Academy of VA Pension Planners
Valerie Peterson, JD Executive Director of Elder
Counsel
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This Session Will Cover
Opportunities
Problem Assets
Solutions
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Skills Required
Knowledge about VA and Medicaid
Knowledge about different class and types of assets and income tax consequences involved in transferring assets
Knowledge of use of types of Trusts and the advantages and disadvantages of each type
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Appropriate Amount of Assets
How to determine what is an appropriate amount of assets
How to determine which assets to retain
Ways to reduce net worth and protect assets
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What does Excessive Mean?
There is no definitive guidance as provided by Medicaid
There is no clear cut regulation or rule that takes the discretion away from the VSR
If they have more net worth than can be excepted to be utilized during their lifetime they have excessive assets
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Veterans Benefits Manual• M21-1MR, Part V, Subpart i, Chapter 3, Section A
d. Purpose of the Pension Program and the Basis for Evaluating a Claimant’s Net Worth
• The pension program is intended to afford beneficiaries a minimum level of security, and not intended to protect substantial assets or build up the beneficiary’s estate for the benefit of heirs. The Veterans Service Representative (VSR) determines whether or not the claimant’s financial resources are sufficient to meet his/her basic needs without assistance from VA. If a claimant’s assets are large enough that the claimant could use these assets to pay living expenses for a reasonable period of time, net worth is considered a bar.
e. Handling a Pension Claim in Which Net Worth Is a Factor
• When handling a claim in which net worth is a factor consider whether it is reasonable, under all circumstances, for the claimant to consume some of his/her estate for maintenance, and deny the pension claim, if a formal finding determines that the claimant’s net worth should be consumed for maintenance.
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Maximum−How does the VA calculate the Maximum amount of assets allowed
Minimum−Why would we want to reduce their assets to the minimum amount
−How should we calculate the minimum amount they should keep
Appropriate Amount of Assets
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VA CalculationsThere is assumption there is a “Rule of Thumb”−Not in regulations
−May be true on low end
Age Weighted Analysis−Calculate amount of assets that will be
excepted to be utilized during the claimant’s life expectancy
−Easy to abuse Claimants
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Age Weighted Analysis
Cash Flow (with VA pension) after medical expenses and life expectancy
Some nominal amount may be allowed
Formula for maximum allowed assets
(IVAP + VA Pension) *life expectancy
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CalculationsAssume Couple with $40,000 of countable assets
Examples #1 #2 #3 IVAP ($4,500) ($2,500) $ 100Pension 1,959 1,949 1,849Cash Flow ($2,541) ($ 541) $1,949Life Expectancy 36 36 36Allowable Assets $91,476 $19, 476 $ 0
#1 would qualify as the assets would be used during the life expectancy but #2 might not and #3 would not.
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Ways to Reduce Net Worth and Protect Assets
There are no penalties for gifting assets prior to filing for benefits
No transfers should take place after filing the application (although there is no reporting requirements for the house)
Gifting assets directly to children has its own risks
All transfers will affect Medicaid qualification
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VA’s Net Worth Analysis
The VA’s analysis of what is the appropriate amount of assets to allow a claimant to retain is not logical. Plan around these limitations. Structure client’s affairs so they benefit the client while not giving the VA any justification for disallowing the claim.
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Planning Opportunities
Trusts
Income Tax Analysis
Referrals to Financial Planners
Restructuring of Assets
Trust Settlement
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Planning Opportunities
Trust
−VAPT (Veteran Asset Protection Trust)
−IDGT (Intentionally Defective Grantor Trust)
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Problem Assets
Certificates of Deposit
Annuities
IRA and Qualified Plan Accounts
Appreciated Property
Closely Held Business
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Problem Assets (cont’d)
Residence
Joint Accounts
Life Insurance Policies
Marital Trusts
Credit Shelter Trusts
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Certificates of Deposit
These are one of the easiest assets to handle
The major issues are the Bank’s reluctance to change ownership and charging penalties
The penalty will be based on the remaining time to maturity and the interest rate
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Annuities
This is a subject that causes the most confusion
The word annuity means different things
Taxation of Annuities
There are two types of annuities
-Deferred
-Immediate
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Annuity Taxation Issues
Gain is taxed at ordinary income rates
Gain is always first out
If ownership is changed, gain must be recognized by transferee
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Types of AnnuitiesDeferred Annuity
−The annuity value is still owned by the purchaser
−The owner can liquidate the annuity
Immediate Annuity
−Deferred annuity converted to a stream of guaranteed payments
−The annuitant does not own the assets in the annuity
−They are owned by the life insurance company
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Deferred AnnuityThis is a countable asset
There are different types of deferred annuities
−Variable
−Fixed
−Indexed
Income taxes
Surrender penalties
Immediate annuity
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Immediate AnnuityMoney is given to the insurance company to purchase guaranteed income for a fixed period of time, such as life or five years
This purchase will convert a countable asset to an income for both VA and Medicaid
Medicaid rules will count the guaranteed annuity payments in excess of the life expectancy as an asset
VA has no rules regarding annuities
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IRA and Qualified Plans
Roth IRA
Regular IRA
Qualified Plan
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Appreciated PropertyStock
Closely Held Business
ResidenceJoint Accounts
Life Insurance
Martial Trusts
Credit Shelter Trusts
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Closely Held BusinessIssues
−Step-up in basis at death
−Transfer of basis
Not a typical situation
Who will manage company
Can business be sold
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ResidenceNot a countable asset
121 exemption offsets gain
Gift of residence will transfer basis
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Joint Accounts
Easiest way to deal with excess assets
The account value is divided by number of owners
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Life Insurance PoliciesSmall policies are not counted
Transfer of policy will not be a taxable event
Transfer within three (3) years of death are included in the estate of the deceased
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Marital TrustsCan be a problem
Terms of trust will determine if there is a problem
Review trust to see if the trust can be terminated
VA will look at control
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Credit Shelter TrustsVA general counsel opinion 33-97 may
cause trust assets to be counted
Trust that would not be countable asset for Medicaid may be countable for VA purposes
VA will look at control
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SummaryThis is not an all encompassing list. If you are going to work in this area you need to become proficient in income taxes and develop a thorough understanding of all types of assets.
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Questions ?
Thank You!