Q. My brother created a trust a few years back, naming our sister as one of his beneficiaries and me as the Trustee. He recently died and we now have a problem:  our sister receives public benefits (Medi-Cal and SSI) and the receipt of an inheritance would cause her to lose those benefits.  Is there a way to change the trust to make some other arrangement for her that will allow her the benefit of the bequest, but also permit her to keep her public benefits?

A. Very likely, yes! The goal would be to reform your brother’s trust to direct your sister’s share into a Special Needs Trust (“SNT”). If properly set up and managed, the assets in the SNT would permit her to continue receiving her public benefits, even while the SNT pays for items which are not covered, or not fully covered, by her Medi-Cal and SSI: Examples: automobile, computer, nicer apartment, furniture, and vacations.

But the problem, of course, is that your brother’s trust leaves the bequest to your sister directly, and not into an SNT, and he is no longer alive to change it. While this is indeed a public benefits problem for her, there may now be a remedy!

Decanting Into A New Trust: A brand new California law just became effective this year (2019), called the “Uniform Trust Decanting Act”.  While we normally think of “decanting” as referring to the transfer of wine from one container to another in order to separate it from older sediment and rejuvenate the wine in the newer container, this vintner’s term has a similar meaning in the world of trusts: Decanting a trust allows the trustee to transfer assets from an existing trust with unwanted provisions into a new trust with more favorable provisions.

To use the new Decanting Act you should engage a knowledgeable attorney to create a new trust which contains the desired SNT provisions for your sister’s share.  Your attorney would then give your sister and all other beneficiaries 60 days notice of the proposed change. If there is no objection, then after the 60 day notice period you would adopt the new trust as your brother’s trust, and then move the assets from his old trust into the new one with the SNT provisions. Alternatively, you might just propose an Amendment as to just your sister’s share, leaving all other trust terms the same. This procedure would protect your sister’s share while allowing her to maintain her eligibility for Medi-Cal and SSI. The beauty of decanting is that it can be handled without court involvement and without the corresponding expense and uncertainty of a court proceeding.

Judicial Modification: If any beneficiary objects, then you have the more traditional option of petitioning the superior court for an order reforming the trust to include the necessary SNT provisions. Before January 1 of this year, this was the traditional approach in situations like yours.  Now, with the new Decanting Act, it can be used as a “back up” if any beneficiary objects.

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A further note on the new Decanting Act:  using it to create a SNT for a beneficiary receiving public benefits is merely one use. It can also be used to modify other provisions of an older trust: Examples: to update tax provisions, clarify ambiguities, change successor trustees, re-designate the place of trust administration, and — in some cases — to unwind an unnecessary A – B Credit Shelter Trust.

This new procedure should certainly be considered in your situation.

References:   “Uniform Trust Decanting Act”, effective January 1, 2019. Uniform Law, Text and Comments. See page 69 re: Credit Shelter Trust Issue.

Special Comments For Elder Law and Special Needs Trust Attorneys:

1) The “Self-Settled” SNT Issue:  When considering Decanting into a newly created Special Needs Trust, timing is critical if the goal is to achieve the benefit of a SNT while avoiding the requirement of a post-mortem “pay back” to Medi-Cal.  Basically, the decanting in this context should be completed prior to the time that the beneficiary  vests as to principal: Decanting prior to vesting would likely permit the creation of the SNT to be characterized as a Third Party SNT (without the need for post-mortem payback provisions), while decanting afterward may require that the SNT be characterized as a First Party SNT (i.e., as a “self-settled SNT”) with the requirement that it contain payback provisions. See, Kroll v New York State Dep’t of Health (App Div 2016) 39 NYS3d 183, aff’d (Oct. 5, 2016) NY Slip Op 06499. Whether this New York case will govern similar proceedings in California, or other states, is presently undetermined.  That said, the careful practitioner desiring to decant to a SNT without needing to include “payback” provisions would be wise to observe its holding, whenever possible, until the law in California on this point is clarified. To be even more cautious, I would recommend that — if time permits — the Decanting be handled pursuant to the Notice provisions of the Act, rather than via the Consent provisions, so as to render it less likely that the creation of the SNT will be considered the volitional act of the target beneficiary.

2) The Problem for Over-Age 65 Beneficiaries: If the Decanted SNT is later characterized by Medi-Cal or SSI as a “First Party Self-Settled SNT”, that is a big problem for a beneficiary age 65 years or older. Reason: a beneficiary over age 65 cannot self-settle a SNT under any circumstance. See, 42 USC 1396p(d)(4)(A). The only option for this beneficiary is to join and fund a Pooled Special Needs Trust, as authorized by 42 USC 1396p(d)(4) ( C). However, even this option has been clouded by a recent appellate decision out of Iowa, called Cox and Cox vs. Iowa Dept of Human Services, decided November 30, 2018, wherein the funding of a Pooled SNT by a married couple — both of whom were over age 65 — was determined to be a transfer for less than fair market value, resulting in a transfer penalty disqualification for medicaid for each spouse. That Iowa decision notwithstanding, the rule in California has long been that a person of any age may join a Pooled SNT without jeopardy to their Medi-Cal eligibility. See, 22 Cal Code Regs §50489.9 ( c). Indeed, the California Dept. Of Health Care Services acknowledges as much on its own website. See Special Needs Trust notice, wherein it recites that a person of “any age” may join a Pooled SNT. See CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.9.

However, there still remains concern as to SSI eligibility under Federal Social Security Law for the over-age 65 SNT beneficiary where the decanted SNT is deemed a “Self-Settled” First Party SNT. The concern is that SSI (unlike Medi-Cal) may impose a transfer penalty of up to 3 years upon funding a Pooled-SNT by the over-age 65 beneficiary. See CEB, Special Needs Trusts, Planning, Drafting and Administration, at §12.10.

Q. My wife and I are considering selling our home and purchasing a replacement home in California to be closer to our children? I hear there may be some way to transfer our very low property tax to our replacement home. Do you know anything about this?

A. Yes. If at least one of you is at least age 55, or disabled, you may be able to transfer your low “base year value” from your current residence to your new residence. But, there are conditions and restrictions, including geographic limitaions, some of which are as follows:

1) The new residence must be located either within the same county as your original home, OR, within one of the following 10 counties which now permit transfers in from other counties:  Alameda,Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne and Ventura. Note: El Dorado County just ended its program, except as to transactions that were in escrow as of November 7, 2018.

2) The replacement residence must be of “equal or lesser value” to your original residence. This is determined by comparing the sale price of your old residence with the purchase price (or the construction cost) of your new residence.  If the replacement home is purchased prior to the sale of your existing home, the purchase price may not exceed 100% of the sale price of your existing home.  But, it can be up to 105% if you purchase your replacement home within the 1st year following sale, and up to 110% if purchased within the 2nd year following sale. Caution: If these equivalency tests are not met, there is no partial benefit. Thus, it is all or nothing regarding the base-year transfer rule, and so you need to be very mindful of the numbers when planning.

3) The replacement home must be purchased or newly constructed within two years either before or after the sale of your original home.

4) You must formally apply for this base-year transfer by submitting the appropriate form to the County Assessor of your new county within three (3) years of the date the replacement dwelling is purchased or newly constructed, although the Assessor can grant relief for late filed claims.

5) You can only use this benefit once, with the following exception: if you have opted for this benefit once based upon age, and you later become “severly and permanently disabled”, you may then use it a second time based upon your disability.

The law regarding base-year transfers has some quirks and you should read up on them as part of your planning.  A good resource is the website of the Alameda County Assessor, which offers information Notices, Questions & Answers, and the relevant Claim Form. The Assessor’s phone number for questions pertaining to Base-Value Transfers is (510) 272-3787. I hope this information helps and extend good wishes on your planned relocation.

References:  Cal. Rev & Tax Code § 69.5;    CAL Constitution Article XIIIA, §2(a) [valuation of real property]; BOE Letter to Assessors 2016/034 (9/15/2016) [List of California counties which have adopted Ordinances permitting transfers in of Base Year Values from other counties]. Alameda County Assessor Information notices:  Notice #1 Re: Base Year Transfers, with Claim Form;  Notice #2 [with Questions & Answers].

Note: Base Year Value transfers are permitted for property substantially damaged or destroyed by a disaster.  CA Rev & Tax Code § 69 and § 69.3.

Q. My wife and I created our estate planning documents about 10 years ago and we really have not even looked at them since. Do you have any thoughts about when we should consider updating them?

A. Yes, I do. I would tie a review and update into a New Year’s Resolution. Many of us resolve to eat healthier and exercise more in the New Year. I would suggest another resolution: persons who have not created an estate plan should resolve to create one; and those who have already created one, such as yourself, should resolve to update them as need and changes in the law may now require.

A very basic estate plan would typically consist of the following legal documents: a “Living Trust”, a backup Will, a Durable Power of Attorney, an Advance Health Care Directive, and a HIPAA Release for each person. These legal documents are designed to be reviewed, modified and updated as circumstances change. Benchmarks for updating them might include: changes in family structure, such as births, deaths, divorces and marriages; changes in your finances or asset ownership; changes in your ability to manage your own affairs and/or the onset of incapacity; the need for long-term care; the disability of a spouse or child; and changes in tax law.

However, as much as we encourage clients to review and update their estate planning documents, too few actually take that advice. In fact, I have seen wills of deceased parents, prepared two or three decades earlier, which still refer to their children as minors, and others that mention only one child when the parents subsequently had more children. Outdated documents can sometimes be more problematic than none at all.

If it has been 10 years or so since you created your documents, you very likely have provisions in them which were designed with old tax law in mind, and which would now might make administration of your estate unduly cumbersome. Example: for married couples, it was common practice years ago, when the estate tax exemption was only $1 million per person or less, of requiring asset splits and sub trust funding at the first spouse’s death in order to minimize the estate tax bite for the survivor’s estate. Now, with the federal estate tax exemption increased to $11.4 Million per person (for persons dying in 2019), and the corresponding option for married couples to double that amount by making a timely election, the need for burdensome sub-trust funding is no longer necessary for most couples. If your 10 year-old plan falls into this category, you may wish to modify it by eliminating this sub-trust requirement and thereby make asset management easier for the survivor.

For those who have not created an estate plan, I would encourage them to do so. Sometimes setting a specific calendar deadline is helpful, such as by setting a goal of creating or updating your plan by March 31 of the New Year.

The New Year is a time for renewal. Let’s add getting your legal affairs in order to your other resolutions. Your elder law or estate planning attorney can assist you in crafting or updating your plan to meet your present circumstances.

Q. I am wondering if I can still get deductions for charitable gifts under the new tax law? Do you have any thoughts on this?

A.  Yes. Under the Tax Cuts and Jobs Act, effective this year, the traditional method of making a gift and itemizing your deductions on your Federal Income Tax Return, as in years past, may not work. This is because of the way the new Standard Deduction works: essentially, your charitable and other qualified itemized deductions would need to exceed the amount of the increased Standard Deduction before you would receive a tax benefit for your charitable gifts. Reason: On your Federal Tax Return, you cannot claim both the Standard Deduction and itemized deductions; you must choose one or the other. Under the new tax law, the Standard Deduction has been almost doubled: it is now $12,000 per year for single individuals and $24,000 per year for a married couple filing jointly.

But, here’s the good news: there are some “workarounds” for those who are charitably minded, but also wish to also receive a tax benefit. Here are three:

1) Bunch Your Deductions and Make Them in Alternate Years.  For example, if you are single and normally make up to $10,000 per year in charitable deductions consider, instead, making $20,000 per year in charitable deductions in alternating years.

2) Consider a Donor Advised Fund (“DAF”) Offered By a Public Charity. Many charities offer DAF’s to their contributors. A DAF allows you to contribute what would normally be several years’ worth of charitable donations into the fund in one year, and receive a charitable deduction immediately. Your contribution would then typically be invested and grow tax-free. Meanwhile, you could make donations to charities from that account as time goes on, whether in the year of gift or in following years. Additional contributions to the DAF in later years would also be tax-deductible. However, you should first check with your financial advisor to choose an appropriate DAF, selecting one with a good management and investment record. Since the advent of the new law, DAF’s have increased in popularity.

3) Consider a Qualified Charitable Donation Through Your IRA. If you are at least 70.5 years of age, and already taking Minimum Required Distributions (“MRD’s”) as required by the IRS, you could arrange to allocate some of your MRD draws directly to a charity of your choice. The contribution would still count toward your required MRD’s, and the distribution will not be included in your gross income, which essentially lowers your overall income tax bill. However, there are special rules. Notably, the contribution must be made directly from the IRA to the charity; it cannot be made to you initially, with you later turning around and sending the funds off to the charity. Check with your IRA custodian to see if it offers this service. I understand that Fidelity, Vanguard, T. Rowe Price, and Charles Schwab offer this option to their customers. Note: the charity must receive the contribution and cash the check before the end of the tax year to make this work.  Although you will then receive a Form 1099-R, it is up to you – not your brokerage company – to properly report the contribution as a nontaxable Qualified Charitable Donation.

Note: On your California Income Tax Return, these deductions will work the same as in prior years.  This means that your deductions may be different for your Federal and State income tax returns.

ReferenceIRS Publication 5307 “Tax Reform Basics for Individuals and Families”.

Q. I hear there is a new scam going around whereby seniors receive phone calls that appear to be from Social Security. Do you know anything about this?

A. Yes. There is a spoofing scam going around the entire country whereby seniors receive calls which appear to be coming from the Social Security Administration, but which in reality are scams. The recipient’s caller ID shows that the call is coming from 1-800-772-1213, which indeed is the phone number for the Social Security Administration, but the call itself is phony. Here is how you can tell:

The caller claims that he or she needs your Social Security number and other personal information in order to process an increase in your Social Security benefits, and may also go so far as to threaten that your benefits will be terminated if you do not provide that information. These are fraudulent calls! If you get one, hang up immediately, and in any event do not give out your Social Security number or other personal information.

The Federal Trade Commission (“FTC”) recently released a consumer advisory about this scam, urging recipients to hang up if they receive one. The FTC advises that the Social Security Administration (“SSA”) will never threaten, will never seek to get personal information over the telephone and will never promise to increase your benefits in exchange for that information. If the caller makes that claim, you can bet it’s a scam call.

If you have any doubt hang up and call SSA directly and inquire. Further, if you get a spoofed call of this nature report it to the SSA’s Office of Inspector General at 1-800-269-0271. Be alert and be safe.

References: FTC advisory issued October 29, 2018.

Q. My mother, who receives Social Security, SSI and Medi-Cal, is thinking of selling her home and either buying a smaller condo, or possibly moving into a spare room in our home. When she sells her home, will she lose her any of her benefits?

A.  She won’t lose her Social Security, because eligibility does not depend upon her income or other resources, but her Supplemental Security Income (“SSI”) and Medi-Cal are at risk unless she plans ahead.

As you probably know, eligibility for both SSI and Medi-Cal depends upon her having very modest resources. For a single individual, one cannot have more than $2,000 in savings or other nonexempt resources in order to maintain eligibility.  The problem: upon sale of her home, she will receive sales proceeds which will inflate her savings to an amount far in excess of that $2,000 resource ceiling. She would then be “over resourced” and would be legally required to immediately notify both the SSI and Medi-Cal programs. Benefits would normally terminate by the following month.   However, if she plans ahead, there may be steps she can take to avoid losing her benefits:

Repurchase “Grace Periods”:  If she plans to repurchase another home, say a smaller condo, she could take advantage of grace periods under each program to temporarily exempt the home sale proceeds, pending repurchase of a replacement home.  During those grace periods, she would maintain eligibility.  There is a three-month grace period to do so under the SSI program and a six-month grace period under the Medi-Cal program. The key is to proactively advise her eligibility workers of her plans, keep the home sale proceeds segregated until the repurchase, and fully complete the repurchase within the grace periods. Unfortunately, the grace period under the SSI program is shorter than it is under the Medi-Cal program, so she would be best advised to complete her repurchase within the shorter grace period.

If she does not plan to repurchase a replacement home, or if she anticipates having excess sales proceeds after she does so, then the planning becomes a bit more complicated.  Yet doing so is still essential to maintaining benefit eligibility, at least under the Medi-Cal program.  Here are some planning options that would protect her Medi-Cal eligibility, even though there is some question as to whether they would also protect her SSI.

Irrevocable “House” Trust:  Before selling her home, she could create an irrevocable house trust, designate you as trustee, and sell it inside that trust. The sales proceeds would then be paid to you, as trustee, rather than to your mother. If handled properly, the sales proceeds would then not increase her countable resources under the Medi-Cal program. After sale, the trustee could use the proceeds to assist mother with her ongoing expenses.

Join Pooled SNT:  Another option would be for mom to join an existing Pooled Special Needs Trust (“P-SNT”) and, upon sale, immediately transfer the proceeds (or the excess proceeds) to the P-SNT. The P-SNT is a trust managed by a nonprofit organization for the benefit of its members on public benefits.  Its professional trustee would oversee management of mother’s funds and would use funds in her account to pay her expenses, albeit in a manner which would not undermine her continuing eligibility for Medi-Cal.

The key for your mother’s situation is to plan ahead.  If she does so, then the prospects of her retaining at least her Medi-Cal are excellent.

References:  Three months grace to sell and repurchase another home under the SSI Program:  20 CFR 416.1212(e), and the six month grace period to do so under the Medi-Cal Prorgram is found at 22 CCR 50426.

 

Q.  I am thinking about just gifting my home to my son now, in order to minimize estate administration after I’m gone. Of course, I would continue to live here as long as possible.  Do you see any downside to this plan?

A.  Yes, there may be a big one, depending upon how you do it. Consider the following:

Taxes: Assuming that your home has appreciated substantially in value since you purchased it years ago, a simple gift of the home during your lifetimes would not be “tax smart”.  An example may illustrate why:

Let’s suppose you bought the home years ago at a price of $75,000, but that it is now worth $775,000.  To keep it simple, let’s also assume that you have not made any substantial improvements to the home. From a tax viewpoint, your tax basis in the home would be $75K, i.e. its cost.  So, if you sold it now for $775 K, you would realize roughly $700K in gain.  Even assuming you are eligible to exclude $250K of gain under the ‘sale of home residence’ exclusion, you would still realize $450K in capital gain upon which you would be taxed.

Likewise, if you gifted the home to your son during your lifetime, he would step into your shoes and would also then have a tax basis of $75K. If he later chose to sell, the home would generate a large potential tax liability for him. Whether he, too, would have the ‘home residence exclusion’ available to exclude some of the capital gain would depend upon whether he met the home residency tests before sale; if he used the home as a rental, that exclusion would likely not be available. In any event, his potential tax liability would be very substantial, and would likely increase over time as the home’s value increased, because it would continue to carry your older, low cost basis.

By contrast, if you passed the home to him as a result of your death, then under current tax law he would receive an adjusted tax basis equal to the home’s fair market value at the time of your death.  Let’s suppose by then the home’s value has increased to $One Million. That would then be his new tax basis, and this adjusted basis would potentially save him tens of thousands of dollars in taxes if he later chose to sell the property.

So, trying to keep things simple now would potentially be very costly for your son down the road.  That said, there are ways to ‘have your cake and eat it, too’:  If you create a lifetime transfer now, but which is only complete at death, then you can both minimize estate hassle and achieve favorable tax treatment. One technique: use a Life Estate Deed, which preserves your right to occupy the home for your lifetime but gives him the ‘remainder interest’ after your demise.

Medi-Cal Subsidy for Long Term Care:  If you believe that you may need long term care in the future, the home transfer should be handled in a manner that complies with the Medi-Cal rules, so as to preserve eligibility and to avoid a post-death reimbursement claim.

Child’s Credit Issues: If your son has unpaid creditors, you may wish to re-think your plan, as the home might then be exposed to his creditors’ claims.

Borrowing Unavailable:  You would not be able to take out a conventional or Reverse Mortgage on your home to help with your expenses.

In your situation, it would be wise to consult with an attorney experienced in these matters before embarking upon your plan.

Q. My wife and I set up a Living Trust back in 2001, but we have never updated it. In view of the recent change in the tax law, is that something that we should consider?

A. Yes, by all means! At the time you created your trust, the estate tax exemption was only $675,000 per person, and the first spouse’s exemption died with that spouse unless the couple’s trust directed a “trust-split” upon the first death compliant with relevant tax rules.

Under that technique, the deceased spouse’s share would go into an irrevocable Exemption Sub-Trust, and the balance would be allocated into the Survivor’s Sub-Trust. To make this work, the survivor would typically have only restricted access to the funds in the Exemption Sub-Trust.  This arrangement would preserve the first spouse’s exemption so that – at the survivor’s later death – the couple’s two exemptions could be combined for use following the death of the survivor, thereby doubling the assets the couple could pass estate tax free to their children or other beneficiaries.

Under former law, this “trust-split” upon the first death was essential to preserving the first spouse’s exemption for later use following the death of the surviving spouse. Very likely, this is the structure of your own trust.

But with the passage of the Tax Cuts & Jobs Act of 2017 (“TCJA”), the estate tax exemption has been increased to $11.18 million per person, at least through the year 2025. Further, the trust-split technique is no longer required to preserve the first spouse’s exemption; now, it can now be preserved for later use by the survivor merely making a timely election on a federal estate tax return. In “tax speak”, the decedent’s unused portion is now “portable” to the survivor.

This dramatic change in the exemption rules has made these older trusts quite problematic in the current tax climate. Here’s why:

Let’s say that you and your wife have an estate worth $3 million, that $2.5 million of that is your own separate property acquired prior to your current marriage, that $500K is community property. and that the value of these assets remains the same over time.  Let’s further assume that your trust directs a trust split upon the first death, requiring the exemption amount to be fully funded (to the extent of the value of your estate) into an irrevocable Exemption Sub-Trust over which the survivor has only restricted access.

First Example: Let’s pretend you died back in 2001, after your trust was signed. Your estate would have been allocated as follows: $675,000 to the irrevocable Exemption Sub-Trust, and the balance of $2,325,000 to your surviving spouse. Under old law, even after fully funding the Exemption Sub-Trust, the survivor would still be left with unrestricted access to substantial assets, both of your individual exemptions would have been preserved, and the plan would have made good tax sense.

Second Example: Now let’s say you die in 2018, when the maximum exemption is now $11.18 Million per person. Your trust has not been changed and therefore still directs that the Exemption Sub-Trust be “fully funded” to the extent of your assets. The allocation would now be as follows: $2.5 Million + $250,000 = $2,750,000 into the irrevocable Exemption Sub-Trust with its provisions for restricted access, and only $250,000 into the Survivor’s Sub-Trust. Big difference.

Note:  Even if your estate is comprised entirely of community property, the difference under the tax law then, and now, is still significant.  If you and your spouse wish to leave the survivor with unrestricted access to your entire estate after the first death, you should have your trust reviewed and updated to meet current tax law. Very likely, your attorney may advise dispensing with the “trust-split” requirement entirely.

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Q. Has the Veterans Administration announced new rules about qualifying for an Aid & Attendance Pension to help Vets with long term care expenses? I recall that they were in the planning.

A.  Yes! The VA just announced final rules for those Veterans and their surviving spouses who seek to qualify for a pension to help with long term care expenses. One of the new rules adds clarity to the asset limit question, while another imposes severe penalties for Vets who transfer away assets in an effort to meet the threshold asset test. These rules were three years in the making and were initiated, in substantial part, to protect Veterans from aggressive marketers selling annuities and other financial products to Veterans, which promoted the divestment of assets just to qualify for pension.

But the new rules will also make it much more difficult for veterans’ advocates to legitimately assist them accelerate eligibility for pension, often known as an Aid and Attendance Pension, which can pay a benefit of up to $2,169 for a married Vet (in 2018). Here are some highlights of the new rules:

1) Net Worth: Under the old rules, a Vet could only qualify for pension if his Net Worth met VA regulations, which were vague and uncertain, resulting in inconsistent awards and denials by VA adjudicators. By contrast, the new rules adopt a “bright line” test to improve consistency.  A qualifying Net Worth will now be the same as for a married couple under the Medi-Cal program, currently $123,600 (in 2018), and this will be the rule whether the Vet is married or single. The Medi-Cal program refers to this amount as the Community Spouse Resource Allowance (“CSRA”), and it will adjust annually by an inflation factor. However, unlike the Medi-Cal program, the VA will include in this number both non-exempt assets as well as the Vet’s annual income (after adjusting out qualifying medical expenses).  This bright line test is considered a vast improvement over the previous vague standard.

2) Transfer Penalties: Under the old rules, a Vet could transfer away assets to adult children, or purchase an irrevocable immediate annuity, and immediately bring down his Net Worth to qualifying levels. There was no transfer penalty.  This planning option has now been gutted. Now, any excess Net Worth transferred away within three years of application will trigger a penalty period of as much as five years, depending upon the value of the transferred assets, during which time the Vet or Surviving Spouse will be ineligible for Pension. The penalty period will only start running in the month of the last such transfer, heavily penalizing serial transfers. The penalty divisor will be the Maximum Pension Rate for a Married Vet, currently $2,169 /month (in 2018).   The transfer penalty provisions are a major development and will all but eliminate crisis planning.

3) Purchase of Annuities Now Eliminated: Once the new rules become effective, a Vet will no longer be able to purchase an irrevocable annuity to convert excess net worth into a stream of income.  Such a purchase will be considered a transfer of assets and will trigger a transfer penalty.

4) Medical Expense Deduction More Liberal: Some good news: the new rules expand the definition of medical expenses that will be allowed as a deduction from the Vet’s income, for purposes of both reducing his Net Worth and increasing his Pension Award. It should now be easier to qualify expenses incurred for home care, even if provided by an adult child, as well as care in assisted living facilities.

Alert: The new rules become effective on October 18, 2018. Until then, the old rules apply.  If a Veteran is considering applying for a VA Pension down the road, and believes he may need to divest himself of assets in order to qualify, he should consider doing so before October 18, because there will then be no transfer penalty even if the application is made long after that date.  Many advocates are therefore urging Veterans in this situation to become proactive about transfers, and to consider making them before the new rules and their transfer penalties become effective.

References:  Federal Register of September 18, 2018, announcing the new rules.

Q. I recently heard the term “Springing” Power of Attorney, but I am not sure what that is. Can you shed any light on this?

A.. Sure. Broadly speaking, there are two general categories of financial Powers of Attorney: (1) those that are immediately effective upon signing by the principal, and (2) those that are only effective upon the happening of a future event, typically the incapacity of the principal.  Attorneys generally call the latter a “Springing” Power Of Attorney, because they do not become effective, or “spring into life,” until the happening of that future event. Which form a client might choose will depend upon the client’s circumstances.

Typically, a client who is healthy and younger would usually prefer a power of attorney that only springs into life in the future, when, and if, he or she is no longer able to manage his or her own financial affairs. Until that event, the client – whom we often call the “principal”— calls his own shots and only he, himself, can enter into transactions that legally bind him.

By contrast, a principal who is up in years and/or sees illness or incapacity on the near horizon, may opt to sign a Power of Attorney (“POA”) that is immediately effective, so as to dispense with the procedural requirement and corresponding delay necessary to establish the requisite incapacity that would make the POA effective, and thereby empower the designated Agent to act for the Principal.

How is incapacity determined?  Many Springing POA’s recite that incapacity is determined when two (2) physicians who have examined the principal write a letter reciting that the principal is incapable of managing his or her own financial affairs, usually due to cognitive decline, dementia or similar maladies.  Note: Notwithstanding that common requirement, I prefer to recite in POA’s that I prepare that only one (1) physician need so opine, and here’s why: Very often the need to establish incapacity in this context arises when the principal is residing in a nursing home.  Typically, in the nursing home setting, only one physician makes the rounds to check on each patient. To secure an evaluation and letter by a second physician in those circumstances can be difficult.

Another option for some clients is to begin with a Springing POA, but as the years pass and they decide they no longer wish to manage their own financial affairs, to sign a simple form reciting that the POA is now immediately effective. That signed form would then be kept together with the POA and handled as a single document, so that it is apparent to all who review it that the principal has opted to make the POA immediately effective. The other alternative, of course, is to rewrite the POA entirely so as to render it immediately effective going forward.

Know that, whichever form you choose initially, you are not forever bound by that decision. So long as you are competent, you can always revoke and revise your POA to make it fit your changing life circumstances.