The VA has made changes to their non-service connected pension benefit eligibility rules, which will take effect October 18, 2018. The focus for this post will be changes made to net worth limit, transfers to annuities in an effort to spend down and divestment penalty rules as it pertains to annuity planning going forward.

Net Worth Limit

There will now be a bright-line net worth limit where the maximum net worth will be the maximum Community Spouse Resource Allowance (CSRA) that is used for Medicaid purposes. This amount was chosen, similar to the reasoning for Medicaid, to avoid impoverishment of the claimant. In 2018, the net worth limit is $123,600. Net worth will be established by considering the claimant’s total countable assets and their annual income.

Now that there is a clear net worth limit, there will be consistency and uniformity when deciding who receives benefits and will also help expedite the application process. Net worth will no longer consider life expectancy, rate of depletion of assets and other such factors when looking at applications. All claimants must be below the net worth limit in order to qualify for VA benefits. If they are over this limit, they will need to decrease their net worth in order to qualify.

Look-Back And Penalty Periods

The VA will now be implementing a penalty period – or a period of time in which the claimant is not eligible for benefits because they made a transfer during the look-back period for less than fair market value. Certain transactions will trigger a penalty period, such as moving funds into an irrevocable trust or an immediate annuity. The look-back period that helps determine how long someone would be subject to a penalty period is three years. During that period, the VA will look to see if the claimant made any transfers for less than fair market value and if they did, they will be penalized. If someone is penalized, their penalty period will begin the month after the last transfer occurred. The maximum penalty period will be five years. Additionally, only transfers above the net worth limit will be considered in the VA’s review.

The other important factor when calculating the penalty period is the divisor. The divisor is the “MAPR in effect on the date of the pension claim at the aid and attendance level for a veteran with one dependent” which is currently at $2,169.

Purchasing An Annuity

Purchasing an annuity used to be a significant tool to help spend down net worth to qualify for benefits quickly. However, the rules now affect the ability to transfer funds into an annuity. For clarification, these rules do not apply to the annuitization of certain employer-based contracts mandated upon retirement.

The VA considers annuities as instruments where resources are transferred for less than fair market value. They also consider annuities to be used to move assets around in order to decrease net worth to gain benefits. Any assets moved into an annuity to help spend down net worth will now be penalized and factored into the three-year look-back period if the annuity is incapable of being liquidated. The monthly payments from the annuity will also be counted as income. If the annuity can be liquidated, then the total annuity amount will be included in total assets.

Spending Down Net Worth

When spending down the net worth, according to the VA, “in the absence of clear and convincing evidence showing otherwise, an asset transfer made during the look-back period was for the purpose of decreasing net worth to establish pension entitlement.” Thus, any transfer not made for fair market value will be penalized, if the amount is over the CSRA limit. A claimant can spend down assets by spending them on “items or services for which fair market value is received.”

There are many changes to planning strategies that need to be made due to the new VA regulations. Future blog posts will include other descriptions of how these regulations will affect the future of VA benefits.

Key take aways from this post:
• Net worth limit is now $123,600 (for 2018).
• Claimants that transferred assets within the last three years will now be subject to a penalty period.
• Immediate annuities will be penalized if purchased within the three-year look-back period.
• Allowable ways to spend down assets are to spend them on items or services that are purchased at fair market value.

If you currently have an open VA case with our office, please contact us right away to learn more about your options going forward. Also, check back soon for more updates related to this industry-wide change.