Advanced VA and Medicaid Planning

Techniques

Dale M. Krause, J.D., LL.M.

PAELA Winter Conference

February 21 – 23, 2014

Bedford, PA

Your Presenter: Dale M. Krause, J.D., LL.M.

0CEO of Krause Financial Services0Licensed insurance agent throughout

the nation0Developer of specialized annuity products0Educator0Expert witness029-years of elder law experience

What’s All This About Changes in VA Planning?

0Numerous House and Senate Bills have been proposed that will change the face of VA planning if passed and enacted0Drafted in response to a Government Accountability

Office report following concerns that unscrupulous organizations were recommending gifts and products that, “may not be appropriate for elderly veterans.”

0Would impose a look-back period similar to what DRA did for Medicaid planning

What Changes Will a Look-BackBring to VA Planning?

0More questions than answers at this point0Look-back period will be 36-months0Will look-back be 36-months from the date of the gift

or 36-months from the date of application?0Most likely from the date of application

0Penalty will be calculated based on the anticipated monthly pension benefit

0Maximum penalty will be 36-months

What Does This Mean For Us?

0Unless client’s made gifts prior to planning, it doesn’t change much of what we do.0Here’s why……we don’t recommend gifts!

VA Case Study

Meet Charles Miller

079-year-old widower0Korean War veteran0Recently lost his wife – primary caregiver0Sold the family home - $155,000 in savings0$1,200 in monthly income0Entered an assisted living facility – charging

$3,767.10 per month for his care

What is Charles Worried About?0Despite medical condition, Charles has

longevity0Concerned with running out of money -

current life savings will only last for 41 months0Does not want to be evicted from

assisted living – forced into nursing home

What is Charles NotWorried About?

0He is not worried about leaving anything to his three children0He believes that they are all financially

stable.

Charles’ Monthly Expenses

UMME$4,236

• Assisted Living - $3,767.10• Medicare Part B - $104.90• Medicare Supp. - $364.00

Other$428.43

• Cable Television - $71.94• Cell Phone - $76.60• Automobile Insurance - $52.13• Entertainment & Incidentals - $227.76

Total

• Total Monthly Expenses - $4,664.43

Charles’ IVAPIncome for VA Purposes

Income $1,200

UMME $4,236

IVAP ($3,036)

What Does the VA Plan Look Like?

All the Above Equate to Charles’ Life Savings - $155,000

61-Month Level-Pay Immediate Annuity - $102,500

Retain Assets in Savings - $30,000

Pre-Paid Funeral Plan - $10,000

Outstanding Bills - $5,000

Estate Plan - $7,500

Level-Pay Immediate Annuity

Single Premium

PeriodCertain

MonthlyPayment

TotalPayout

$102,500 61 Months $1,706.43 $104,092.23

• With Charles being 79 years of age, he has a Medicaid life expectancy of 8.41 years/100.92 months.

• The period certain was determined based on Charles’ monthly income need, but stayed within his Medicaid life expectancy.

VA Eligibility

Total Monthly Income

$2,906.43

UMME $4,236.00

IVAP ($1,329.57)

IVAP ($1,329.57)

VA Pension Benefit

$1,758.00

Excess Income $428.43

Why is there Excess Income?

0Excess income created by the plan is identical to Charles’ non-medical monthly expenses

Cable Television $ 71.94Cell Phone $ 76.60Automobile Insurance $ 52.13Entertainment & Incidentals $227.76

$428.43

Economic Results0Charles has total monthly income of $4,664.430Charles has total monthly expenses of $4,664.430No need to take from $30,000 retained in savings

0 Can be used for increases in cost of care0Will not accumulate excess monthly income

Advantages of the Plan0Charles passes after residing in the

assisted living facility for 45 months0$79,110 of VA benefits received0Maintained control of his money throughout his

lifetime and received the care he needed0Ultimately provided a wealth transfer of $47,302.88

to his children0$27,302.88 remaining in his annuity0$20,000 remaining in his savings account

Does Charles annuity need to be DRA compliant for VA Planning?

0No.0The VA does not require that an annuity be

irrevocable as to the parties, non-assignable, or name a certain beneficiary

Contingency 1 – Nursing Home0Assume Charles enters a nursing home in

month 45 rather than passes away0He wants to immediately qualify for Medicaid

benefits or “Merge onto the Medicaid Highway”0Charles has two options:0Option 1: Sell his annuity on the secondary market, or0Option 2: “Flip the switch” and make the annuity

compliant with DRA

Option One: Selling the Annuity

0Step 1: Sell the annuity to a family member or on the secondary market – J.G. Wentworth

0Step 2: Proceed with a Gifting/Medicaid Compliant Annuity Plan utilizing annuity sale proceeds and funds left in his savings

0Step 3: Apply for Medicaid and be deemed ineligible due to gift, knowing eligibility will exist thereafter

Option Two: “Flipping the Switch”

0Step 1: Reduce savings account to $2,000 through the purchase of a Medicaid Compliant Annuity

0Step 2: “Flip the Switch” and convert his current annuity into a Medicaid Compliant Annuity - name the state as primary beneficiary, and make the annuity irrevocable and non-assignable

0Step 3: Apply for Medicaid and be deemed eligible – co-pay equals social security and annuity income, less a personal needs allowance and any supplemental insurance

But Won’t the Immediate Annuity be an Uncompensated Transfer for Medicaid

Purposes?0 If the “switch” is flipped before the Medicaid application

is made, the Medicaid office sees an annuity that is:0 Irrevocable0 Non-assignable0 Actuarially sound0 Provides equal payments0 Designates the Medicaid agency as a beneficiary

0Meeting the requirements of the Deficit Reduction Act of 2005, the purchase will be deemed a compensated transfer

Contingency 2 – More AssetsWhat if Charles had $202,500 to invest into an annuity?

Charles has total monthly expenses of $4,664.43

Charles has total monthly income of $4,664.43

Charles invests $38,900 into a 100-month balloon style annuity which pays him $28.90 per month – balloon of $37,928.90

Charles invests $163,600 into a 100-month level pay annuity which pays him $1,677.53 per month

Charles still only needs income of $1,706.43 from an annuity

Pending VA Legislation

0 “VA may also consider the transfer of an asset , including transfers to an annuity , trust or other financial instrument or instruments, as a disposal of a covered resource for less than fair market value if it reduces the corpus of a veteran’s estate that could reasonably have been used for the veteran’s maintenance.”   

0This language in one of the proposed VA bills could be interpreted in two ways.0 1. An annuity that is actuarially sound would not be a transfer for

less than fair market value and with the planning technique just outlined, the corpus is still used for the veteran’s maintenance

0 2. The purchase of an annuity would create a penalty period no matter what

Recent Annuity DecisionZahner v. Machereth

0On January 16, 2014, the United States District Court for the Western District of Pennsylvania held that a DRA Compliant Annuity with a term of 60-months was a legitimate, retirement-planning tool, while an annuity with a term less than 24 months was a sham-investment and a transfer for less than fair market value

0Case is being zealously appealed0Worst case scenario – all annuities in PA Medicaid

planning would need to be at least 24-months

How do I Learn More About Planning with These Products?

0We offer complimentary planning for Medicaid and Veterans Benefits

0Step outside and speak with Stuart to learn more about the planning techniques available to you and your clients, and grab a 2014 Krause Report