Excess Asset Management Session with James Swain and Valerie Peterson

1. Excess Asset Management • James (Jim) Swain, JD • Founder and CEO of the Academy of VA Pension Planners • Valerie Peterson, JD • Executive Director of Elder Counsel

2. This Session Will Cover • Opportunities • Problem Assets • Solutions

3. 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

4. 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

5. 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

6. 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.

7. Appropriate Amount of Assets • 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

8. VA Calculations • There 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

9. 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

10. Calculations Assume Couple with $40,000 of countable assets Examples#1 #2 #3 IVAP ($4,500) ($2,500) $ 100 Pension1,959 1,949 1,849 Cash Flow ($2,541) ($ 541) $1,949 Life Expectancy 36 36 36 Allowable 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.

11. 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

12. 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.

13. Planning Opportunities • Trusts • Income Tax Analysis • Referrals to Financial Planners • Restructuring of Assets • Trust Settlement

14. Planning Opportunities • Trust • VAPT (Veteran Asset Protection Trust) • IDGT (Intentionally Defective Grantor Trust)

15. Problem Assets • Certificates of Deposit • Annuities • IRA and Qualified Plan Accounts • Appreciated Property • Closely Held Business

16. Problem Assets (cont’d) • Residence • Joint Accounts • Life Insurance Policies • Marital Trusts • Credit Shelter Trusts

17. 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

18. 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

19. 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

20. Types of Annuities • Deferred 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

21. Deferred Annuity • This is a countable asset • There are different types of deferred annuities • Variable • Fixed • Indexed • Income taxes • Surrender penalties • Immediate annuity

22. Immediate Annuity • Money 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

23. IRA and Qualified Plans • Roth IRA • Regular IRA • Qualified Plan

24. Appreciated Property • Stock • Closely Held Business • Residence • Joint Accounts • Life Insurance • Martial Trusts • Credit Shelter Trusts

25. Closely Held Business • Issues • Step-up in basis at death • Transfer of basis • Not a typical situation • Who will manage company • Can business be sold

26. Residence • Not a countable asset • 121 exemption offsets gain • Gift of residence will transfer basis

27. Joint Accounts • Easiest way to deal with excess assets • The account value is divided by number of owners

28. Life Insurance Policies • Small 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

29. Marital Trusts • Can 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

30. Credit Shelter Trusts • VA 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

31. Summary • This 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.

32. Questions ? Thank You!