Is Applying for VA Pension Benefits Always the Right Answer Even if You Can?


After working with clients seeking the VA pension with Aid & Attendance, certain client profiles became apparent where the VA pension may not be in the best interest of the client(s).  Any attorney practicing in this arena must be attuned to myriad factors affecting the client’s decision to file a VA pension claim, such as the client’s age, health, prognosis and life expectancy, net worth, income, housing choice (home, assisted living, memory care, board and care, etc.), expected changes to the living condition and more.  In addition, the type of assets that a client holds can be the most important factor in determining whether or not to file a VA claim.


As mentioned in previous blogs, VA planning and Medi-Cal (Medicaid) planning are quite different.  Assets that are exempt under the Medi-Cal rules often are not exempt under the VA Pension rules.  One asset causing particular problems in VA planning is the IRA.  In California IRAs are not countable resources (if in pay status for the institutionalized spouse).  However, they are not exempt under VA Pension calculations.  What I have seen is a marked increase in clients presenting me with IRAs of substantial value.  The challenge is to do something with the IRA to make it not countable but without causing huge tax consequences.


When dealing with IRAs, there are really two extreme options.  The client can annuitize the IRA by investing the entire IRA into a single premium immediate annuity.  The downside of this approach is that the income generated from the annuity may be too large in relation to the share of cost and thus will not help the client in accessing the VA Pension.  Additionally all the cash is irrevocably tied up in this annuity and the client can no longer access a lump sum if needed.


On the other extreme, the client can liquidate the IRA and transfer the funds into an irrevocable trust or to the heirs.  Here there are tax consequences as the entire IRA value will be income in the year of liquidation.  This income may be offset by medical deductions but the larger the IRA the less can be sheltered.


An option in the middle may be liquidating some of the IRA and transferring the funds and annuitizing the remainder.  Detailed analysis must be done to find the “sweet spot”, often requiring services of a CPA or accountant to run tax returns based on different scenarios.


There are similar issues with deferred annuities that have substantial accrued income in the policies.


Clients have to be aware of the extra time the attorney needs to devote to this analysis (which translates into higher legal fees) to best position the client’s assets or to determine that the VA Pension does not make economic sense to pursue.


The bottom line is that even though the client could qualify for the VA Pension, the cost of doing so may be too great and thus the advice would be not to pursue the Pension.

This entry was posted on Tuesday, September 9th, 2014 at 6:37 pm and is filed under Estate Planning, Medi-Cal, Veterans.