June 2023 Newsletter
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
VA Pension Benefits. Previous issues of this newsletter have addressed certain aspects of veteran pension benefits. In this edition, we will focus on the non-service-connected pension (NSC), often erroneously referred to as “aid and attendance”. This NSC pension is designed to provide monetary assistance for veterans and the deceased veteran’s spouse with unreimbursed medical expenses. There are both service requirements and financial requirements. The resource cap is currently $150,538 excluding a home on a lot size of less than two acres. A larger lot would require that the value be included. There are also transfer penalties for assets transferred within three years of eligibility. In addition, income for VA purposes (IVAP) is measured. From that amount, the unreimbursed medical expenses will be subtracted, and if the resulting amount is lower than a preset table of rates depending on marital status and eligibility for the additional aid and attendance benefit (“aid and attendance” is an additional layer upon a veteran’s base benefits and not a stand-alone benefit), then the veteran or spouse is eligible to receive monetary compensation. When IVAP gets to zero or becomes negative, the veteran receives the maximum benefit. The NSC pension is essentially an income supplement based on income reduced by unreimbursed medical expenses. There are organizations that facilitate obtaining the NSC pension. The problem is that a veteran or spouse may be often persuaded to put in place certain financial arrangements that may later jeopardize Medicaid eligibility. Medicaid eligibility is significantly more important. Advisors are not allowed to charge for applying for the NSC pension, but some find ways of selling financial products and generating a commission. People should be very wary of such arrangements. In the next issue we will address the service-connected pension.
Common Asset Protection Planning Errors – Continued. In the context of Medicaid, certain real estate is exempt in the case of a husband and wife. The residence is exempt, whether owned by either or both spouses, and income-producing real estate is also exempt. Other real estate, such as raw land, would not be exempt. If non-exempt real estate is owned at the time that one spouse seeks to become eligible for Medicaid, that real estate may count toward the assets that the community spouse (i.e., the non-Medicaid spouse) may retain. At times that can be a positive advantage. Suppose that in addition to the exempt residence and an exempt vehicle, the spouses own raw land that is not income-producing having a value of $50,000. Let us assume they also own $50,000 of cash. The resource assessment date would be the date of hospitalization followed by a nursing home admission, or the date of initial nursing home admission. The total resources as of that date would be $100,000. The community spouse is generally allowed to retain one-half of the total countable assets as of the resource assessment date, not to exceed a certain maximum amount. In this case the community spouse would be entitled to retain $50,000, which would mean that in order for the Medicaid applicant spouse to become eligible for Medicaid, the excess resources would have to be made to “disappear.” This could be done simply by deeding the non-exempt real estate into the name of the community spouse, as all real estate owned solely by the community spouse is exempt. A common mistake is to transfer real estate to the community spouse too soon. Suppose that, before the resource assessment date, the property was conveyed to the community spouse. There may be good reasons for doing that, but if that was done, then as of the valuation date the community spouse would own the property, making it exempt, and the total countable resources would be $50,000. This means that in order to qualify the Medicaid applicant spouse for Medicaid, some of the cash would have to be made to “disappear.” There are various ways of doing that. However, if the property had been retained and then deeded later, no separate or other arrangements would have to be put in place in order to position the Medicaid applicant spouse for Medicaid. The premature transfer of non-exempt real estate to a spouse is a common error, and while there can be legitimate reasons for doing so, when done, that step should be taken with full awareness of the implications of doing so.
Total Return Trusts. Most people understand the difference between income and principal. If a trust is holding assets, and those assets are generating income, then the assets will be principal and the income, and if not paid out, will become part of the principal of the trust. The way assets are invested will determine how much income is generated and how much growth there is in the principal of a trust. If assets are generating less income and more growth, a beneficiary may receive less in terms of total distributions. If principal distributions are allowed, then the needs of a beneficiary can be met with additional principal distributions. A total return trust is a trust that will pay out benefits based on a stated rate applied to the value of the trust each year. For example, distributions might be equal to 5% of the total value of the trust. Usually an average over a period of time will be used so that wide swings in value will not significantly affect the amount being distributed to the beneficiary. Using such an approach can be very beneficial, since the amount that a beneficiary receives will not be based on income, but will take into account the total return of the trust, i.e., both income and growth. Over time, the beneficiary may receive more. In times of downturn, if an average is used, the downswing may not impact the beneficiary too significantly. Much of the tension will be reduced between the beneficiaries receiving current distributions as compared to the beneficiaries who will ultimately receive the assets when the trust terminates, since in such a case the income beneficiary is generally seeking more income while the remainder beneficiary is generally seeking more growth. Total return trusts have a definite place in planning for a beneficiary’s particular circumstances and justify distributions that are not solely dependent on income.
Additional Information. Future issues of this newsletter will address other issues of current interest. Please contact my office with any questions that you might have.
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