Every year I look forward to my annual Veterans Day article because it’s a chance to focus on helping advisors properly serve those who have served our country. In this issue I cover four little-known, but very important VA-related topics than can help you better understand how VA benefits and Medicaid planning can better work together.
Issue 1: What’s all the fuss over $90?
One of the first things that most advisors don’t understand is how the VA benefit and Medicaid directly interrelate.
The VA Aid and Attendance benefit does not arise to pay for care. That’s a huge misunderstanding.
I see advisors – even accredited VA agents – frequently get this wrong.
Once a person has depleted assets below a threshold, eligibility is established only after care expenses have already eaten away a veteran’s ordinary income. The same applies to the spouse or widow of the veteran. The full VA benefit accrues when income is totally “eclipsed” by the cost of care. In fact, a benefit maxes out only after the income is eclipsed by over 5%. For example, the veterans’ ordinary income is $2,000 a month; allowable medical expenses must exceed $2,100 to get the full benefit. The VA pension benefit is considered the money to live on AFTER the veteran’s regular income has been wiped out by care costs.
What is the full benefit? For a married veteran, it’s $2,085 per month. For a single veteran, it’s $1,795. And for a widow of a veteran, it’s $1,030.
However, the full benefit changes when the claimant becomes eligible for long-term care Medicaid in a facility. It drops down to $90 a month!
So what’s all the fuss over a $90 benefit? There are a number of issues to contemplate when balancing VA and Medicaid Planning.
The VA benefit can be applied to before an eligible claimant goes into a nursing home. It can be used for home care or to pay for assisted living and would slow the depletion rate of resources. In a skilled nursing home, it can be used to private pay longer. This may delay the veterans’ transition to a semi-private bed from a private room.
The benefit amount only decreases when the claimant becomes eligible for long-term care Medicaid in a skilled facility. Many states offer intermediary care through home and community based service (HCBS) waivers. If the person is eligible for Medicaid assistance, the VA benefit does not drop down to $90. Why would this matter if Medicaid picks up the difference between income and care costs? Mostly it matters because of estate recovery. VA benefits do not have to be repaid, while long-term care Medicaid and HCBS Medicaid benefits must be recovered through estate recovery. For a single veteran wanting to get care at home, this would be $1,795 of benefits each month that wouldn’t have to be recovered – meaning that Medicaid pays less and recovers less if there is an asset, such as a home, subject to estate recovery.
The $90 benefit is still a bit of a boon to the veteran. In a majority of states, the personal needs allowance (PNA) hovers between $30 and $60 a month. That’s the amount that can be retained by the Medicaid patient to pay for personal things like haircuts or clothing. When a person is dually eligible for facility Medicaid and VA benefits, some states will let the patient keep the higher of the two amounts or will let the patient keep both the PNA and the $90 VA benefit.
But why go through the hassle even if it’s only $90? Mostly because you have to. Something else that few people understand is that in order to be eligible for long-term care Medicaid benefit an applicant must file for any other benefit programs that he or she is entitled to. That includes SSI for younger LTC Medicaid applicants and VA benefits for those who may qualify.
Issue 2: Medicaid half-a-loaf on steroids
In many states, the advanced half-a-loaf strategy plays on the pre-DRA half-a-loaf strategy in which a patient gave away half of the countable assets and used the other half to pay through the penalty period for the half given away. That worked great when the penalty started on the date of the gift; but once the DRA changed the penalty start date to the date the patient is otherwise eligible things got trickier.
The modern approach is to give away half and use a short-term Medicaid compliant annuity or promissory note to pay through the penalty period. Since the penalty period starts after the patient is below resources, the gift causes a penalty by the transfer to the annuity or promissory note does not.
In reality, “half” is a misnomer since the formula (which can be found in my textbook) balances the cost of care and the penalty imposed based on the divisor with the income contribution during the penalty period. In short, the higher a person’s income the less of an annuity they need and the more money they can gift.
The VA benefit only drops to $90 when the person is approved for long-term care Medicaid not when the person applies. So when an applicant is using a modern half-a-loaf strategy to achieve Medicaid benefits, the amount of money to be gifted can be increased dramatically when the full VA benefit is used along with ordinary income and the annuity income to pay through the penalty period.
More VA income equals a lower annuity or promissory note amount needed to pay through the penalty period. This increases gifting and can help preserve extra resources for the veteran that would have otherwise been spent down.
As a side note: once Medicaid starts paying, don’t forget to notify the VA so they can decrease the benefit amount.
Issue 3: Financing home care for indigent veterans
An issue I have seen a lot more of late is the use of the VA benefit to pay for home care.
Most states will require a person to become fully Medicaid eligible (i.e., have assets under the individual countable resource allowance which in most states is $2,000) to get HCBS home care. For some, this is great. But it’s hard to live at home with less than $2,000 for emergencies and some managed care programs under Medicaid won’t let the patient choose their providers.
For veterans who don’t wish to spend down to such paltry levels, the VA Aid & Attendance homebound benefit can be a way to stay at home longer with lower care costs than going into a facility. But for indigent veterans, they are forced onto Medicaid because they can’t afford to eclipse their income with care costs to get the benefit. It’s a Catch-22 that many find frustrating.
If a person is indigent but the state does not provide a home care program or they would like to be able to choose their provider, an indigent veteran can feel stuck. The Aid & Attendance benefit doesn’t kick in until the veteran has completely wiped out or “eclipsed” their income with care costs. In a nursing home, that’s easy enough to do; but while living at home, unless a veteran has deep pockets to pay for care there’s no wiggle room in the family finances to pay that much.
And it’s not like the VA pays out the benefit the moment there are care costs. An application can take 3 to 6 months to work its way through the VA bureaucracy. For an indigent veteran, there’s no way to directly pay those mounting care costs while they wait and most have to wait longer because they do not have access to the right kind of advice they need to expedite a claim.
The solution for this comes in a number of forms, but can be a real win-win for all involved. There are a number of financing options out there where a veteran can seek home care of his or her choosing and use the financing option to pay for care without needing to have their own resources to pay for care. The costs can adequately exceed the income consistent with achieving the maximum benefit. And the financed amount can be repaid from the accrued benefit which pays retroactively from the claim date.
Issue 4 – Gift-and-wait with a boost
There are two important time frames when dealing with gifts or transfer under Medicaid: The lookback period and the penalty period.
The lookback period is five years from the date of application for long-term care Medicaid and/or HCBS care in most states. (Note: some states do not apply transfer penalties for eligibility to their home care programs.)
The penalty period starts when the applicant applies for Medicaid. The penalty period is based upon the person being otherwise eligible for Medicaid (i.e., broke) and takes into account the total amount of gifts given away in the last five years. There is no limit on the penalty period.
The concept of “gift and wait” is to gift assets and wait out the five-year lookback period. This works well if you can wait that long, but some people can’t. On the other hand, those who spot the need to do this kind of planning are often at the early stages of decline when they can still be cared from in less expensive settings like their own home or assisted living.
The VA currently has no penalty period on gifting of assets prior to the claim date. While some in congress have attempted to impose one, such efforts have not been successful.
When gifting to wait out the lookback period, assets are transferred to a person or to a trust. If the person applied for Medicaid the entire amount of the transferred assets would be used for a penalty period, but when applying for VA benefits the assets would not be included in what’s considered available for their care.
So in practical terms, when a veteran needs home care or assisted living he gifts away assets with the intent of waiting out the lookback period. The cost of home care or assisted living care is used to qualify the veteran for the VA Aid & Attendance benefit which pays out monthly during the five years the veteran is waiting to go on Medicaid.
Care costs during the five-year wait are going to be the responsibility of the veteran or the recipient of the gift. But with the VA benefit, less of those assets will be needed to pay for care costs while the veteran waits. For a married veteran, five years of benefits is roughly $125,000 in tax-free money from the VA towards the cost of care during the waiting period! That’s not chump change – it’s a huge boost.
After that, the veteran can apply for facility Medicaid or even home care Medicaid and all of the transferred funds do not count towards a penalty period because the veteran has waited out the look-back period with a little help from the VA.
Take this example: A veteran goes into assisted living and has $425,000 in assets. He gives away $400,000 and immediately becomes financially eligible for the VA benefit. His assisted living costs $4,000 a month and he has social security and a small pension of $1,500. Every month he has a $2,500 shortfall. He applies for and receives the VA benefit of $1,759 per month retroactive to the month he went into the assisted living facility. That brings his shortfall down to less than a grand a month.
For 60 months, he’ll use up his $25,000 and maybe another $50,000 from the gifted funds towards his care expenses if he can stay in assisted living. After the 60-month wait, he can apply for Medicaid and the remainder of the gifted funds will not be taken into account towards his Medicaid eligibility – protecting around $350,000 of his hard-earned money.
The VA benefit helped him pay through the lookback period while he waited for Medicaid eligibility and protect an additional $105,000 to help with actual care costs while he waited out the lookback period.
Of course, real cases rarely come in the vanilla variety of this example. There can be assets that are hard to gift like IRAs or highly appreciated assets or other complications. This is why you need to A) learn how Medicaid Planning and VA planning work together, which I teach in my Medicaid Planning course, B) become a Certified Medicaid Planner™ like me so the public can recognize your impressive knowledge and skill-set, and C) work with a team like mine who can help you with your complex planning issues and provide you with the most advance product solutions for all aspects of Medicaid and VA benefit planning.