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In September of 2018, the Department of Veterans Affairs (VA) released new rules for non-service connected disability pensions. These are needs-based pensions that provide tax-free monthly monetary benefits for disabled and elderly veterans or their surviving spouses. These pensions include the following: the Basic Veterans Pension, Survivors Pension (also referred to as the Death Pension), Aid & Attendance Pension, and the Housebound Pension. These new VA rules, which include a Look Back Rule and a set, will become effective October 18, 2018. While these rules were first proposed back in 2015, unlike with Medicaid, the VA has never had a look back rule or set net worth limit until now.
What is the VA Look Back Rule?
The VA look back rule, also referred to as a look back period, establishes a period of 36-months (3 years) in which the VA “looks back” on all asset transfers made for less than they are worth. The look-back rule is a huge change from how asset transfers were handled in the past. Previously, there was no VA look back period, nor was there a penalization period for gifting/selling assets for less than fair market value. However, with this new rule, the 36-month look back period begins the date of one’s VA pension application, dating back three years. If one is found to be in violation of the look back rule, a period of VA pension benefit ineligibility (up to 5 years) will be the penalty.
This new look back rule is intended to prevent veterans and surviving spouses from gifting assets or selling them for less than they are worth in order to meet the new net worth (asset) eligibility limit of $123,600 for pension applicants.
How the Look Back Rule Impacts the Net Worth Limit
With the implementation of the new look back rule, another new rule, which also goes into affect on October 18, 2018, is very important to mention. In previous years, there has been no established net worth limit set by the VA. However, it was previously advised that a veteran or surviving spouse have assets no greater than $50,000, and a veteran with a spouse not have assets over $80,000. That said, with the new rule, the VA has set a firm asset limit of $123,600. This figure, which will include the assets of one’s spouse (if married), will increase annually as Social Security benefits are increased.
Net worth includes checking, savings, and money market accounts, mutual funds, and stocks. Some assets are not counted towards the new net worth limit of $123,600, and include one’s primary home on up to 2 acres of land (acreage in excess of 2 acres will be counted towards one’s net worth), household goods, a personal vehicle, and personal items, such as clothing.
Another important note, the new VA rules also indicate that income is to be considered part of one’s net worth as of 10/18/18. Therefore, one’s monthly income is multiplied by 12 and added to one’s net worth. Therefore, if a veteran or surviving spouse receives $1,200 / month in income, $14,400 ($1,200 x 12 = $14,400) will be added to one’s net worth. However, one can deduct unreimbursed medical expenses (meaning they are not paid for by insurance) from their income, effectively lowering one’s income to be applied towards one’s net worth. Examples of unreimbursed medical expenses include insurance premiums, in-home care, and assisted living / nursing home costs.
What if I Have Violated the Look Back Rule?
A violation of the 36-month look back period can result in a penalty period of up to 5 years. Said another way, one can be ineligible for VA pensions for as long as 5 years. However, there is a loophole for those who have violated the look back period. If they are able to get their assets back prior to pension application, or within 60 days of VA determination that the penalty period was violated, the penalty period can be reconsidered. Even a partial recuperation of assets can result in recalculation of the penalty period. This means that the penalty period can be reversed, either fully or in part when an applicant is able to get their assets returned to him/her. Candidates concerned they may have violated look back rules may wish to consult with a VA pension planner.
How is the Penalty Period Determined?
The penalty period for violating the look back period is calculated using the Maximum Annual Pension Rate, abbreviated as MAPR, for the Aid & Attendance Pension category for a veteran plus a dependent. As of 12/1/17, the pension rate is $26,036 / year ($2,169 / month). In simple terms, when an applicant is in violation of the VA look back rule, the value of the transferred or gifted asset(s) is divided by $2,169. (The new pension rate for 2019 will be released on 12/1/18 and will be effective 12/31/18). This calculation will produce the number of months that a veteran or surviving spouse will be ineligible for VA pension benefits. The first day of the penalty period will start the beginning of the month following the last asset transfer that violated the look back rule.
Please note, as mentioned previously, applicants are able to have up to $123,600 in assets for eligibility purposes. This means that only the portion of transferred assets that are in excess of this amount are counted towards the penalty period.
Jack is a single veteran with a net worth of $120,000 at the time of his submission of a VA pension application. (Recall that the net worth limit is $123,600 as of 10/18/18). However, Jack transferred $20,000 to a relative during the 36-month look back period. Had he not made the transfer, Jack would have $140,000 in net worth. This means that he has violated the look back period by $16,400 ($140,000 – $123,600 = $16,400). When calculating the penalty period for violating the look back rule, the calculations will be based on the amount that is over the net worth limit of $123,600, so $16,400. As mentioned above, the penalty period divisor, as of the time of this writing, is $2,169. Therefore $16,400 is divided by $2,169 and equals a penalty period of approximately 7.5 months. This means for this period of time, Jack is unable to receive pension benefits. As mentioned previously, the penalty period start date is the first of the month following the date from which the last asset transfer that violated the look back period was made.
Exceptions to the Look Back Period
Remember, if a veteran or surviving spouse gifted assets or sold them for less than they are worth, but never had net worth over the established limit of $123,600, he/she will not be in violation of the look back rule. For example, say a veteran has $100,000 in assets and gifts $30,000 to his/her adult daughter. This leaves the veteran with $70,000 in assets. This transaction does not violate the VA’s look back rule, as the veteran never had assets over the net worth limit of $123,600. However, say a veteran has $145,000 in assets and gifts $25,000 to a sibling, leaving him/her with $120,000 in net worth. This is in violation of the look back rule since the veteran initially had more than $123,600 in assets when he/she gifted cash to a sibling.
Another exception to the look back rule is when veterans or surviving spouses transfer assets in order to set up a trust for their disabled child. Please note, the child must have been deemed disabled and unable to support himself/herself prior to the age of 18.
In addition, veterans and surviving spouses are able to “spend down” their excess assets without violating the look back period by spending them on services and other items valued at fair market value. In order to reduce one’s net assets, purchases must be for non-countable assets. Examples include paying medical bills prior to qualification for VA benefits, pre-paying for a burial policy, buying a new vehicle, or even spending funds on a vacation.
What About Annuities?
Prior to the establishment of the new VA rules effective 10/18/18, annuities were used as a means to lower a veteran or surviving spouse’s net worth to qualify for VA pensions. (Annuities provide a way for assets to be turned into an income stream). However, with the new VA rules, veterans and surviving spouses will no longer have this option. Any transfer of assets into an annuity to “spend down” one’s net worth to meet the asset requirement will now be in violation of the VA look back period if the annuity cannot be liquidated (cashed out). In addition, if it cannot be liquidated, while it will not be counted towards one’s net worth, the monthly payments will be counted towards one’s income. If the annuity can be liquidated, the annuity will count towards one’s net worth, but will not violate the look back period.
Please note: This new rule only applies to applicants that have excessive net worth. Said another way, if a veteran or surviving spouse created an annuity, but never had assets in excess of $123,600, this new rule does not apply to him/her. Another exception to this rule is the requirement of annuities upon retirement from employment. While this type of annuity will not violate the look back rule, the monthly income from the annuity will still be counted as income.
What if I Have a Pension Application Currently Pending?
Veterans and surviving spouses who have a VA pension application pending prior to the new look back rule’s effective date of 10/18/18 will not be impacted. In fact, only asset transfers and gifts made AFTER the effective day of 10/18/18 will violate the look back rule. To be very clear, if a veteran or surviving spouse gifts assets or sells them for less than fair market value before the date of 10/18/18, they will be disregarded even if they fall within the 36-month look back period for an applicant.
Professional VA Planning Assistance
With the new VA rules, there is some uncertainly regarding planning strategies that can be used to lower one’s net worth without violating the new look back rule. This page will be updated as greater details become available. That said, there are workarounds that can assist veterans and surviving spouses in meeting net worth eligibility requirements for VA pensions. If you have net worth greater than the new set limit of $123,600, or have questions in regards to applying for a VA pension, do not hesitate to contact a professional VA planner. Applying for benefits is a complicated, and often times, confusing process. Working with a planner can ensure one is doing everything correctly to avoid delaying benefits, denial of benefits, or violating the VA’s new rules. Find a professional VA planner here.