I was recently asked an in-depth question regarding a spouse qualifying for VA benefits. I thought this topic would be of interest to those who read my blog.
Summary of question: My mother recently placed my father in a nursing home due to his dementia, which has proved to be a huge financial burden. However, my mother is not eligible for Veteran’s Aid since she has a sizable IRA account and, therefore does not qualify for aid. If she converts her IRA account to an annuity, she could qualify for government aid while not being taxed for early withdrawal of her IRA account. My mother has serious reservations about her money being tied up in an annuity and my questions are as follows: “Could we transfer the IRA into something other than an annuity that would not levy a heavy tax burden? If not, then she would go with an annuity only if she were assured that we would qualify for Veterans Aid. Under the eligibility requirements for VA she could only have $80K in savings and her house, but what would her allowable monthly income be? Would paying off her mortgage from the IRA account be tax exempt?”
Answer: There are three VA “special pension” programs as follows: 1) Low Income, 2) Housebound and 3) Aid and Attendance. These programs are only available to Veterans who served during a period of war and their surviving spouses. These are “means based” programs, meaning that in order to qualify, the VA will make a determination of whether or not the applicant has the ability to support themselves. For administrative convenience, the VA has set a rule that no application will be approved if the applicant has more than $80,000 of assets without VA headquarters approval. Rarely is such approval granted.
For doing the asset calculation, the VA does count the value of assets held in a retirement account (unlike Medi-Cal).
So I understand your question to be how your mother can rearrange her assets so she can qualify for the VA benefit. There are a variety of ways to do this. First, if the assets in the annuity have no cash surrender value, the assets are ignored. However, the annuity will have to meet all of the IRS guidelines including being actuarially sound based upon your mother’s age. Thus, although the principal amount of the annuity would be ignored, the required distributions will be considered in determining her income.
I understand your concern about taking the money out of the IRA and paying the income taxes on it. However, you may need to get over that. If paying the income taxes on the distribution and moving the remaining assets to an exempt form is the only way to qualify her for the VA benefit she needs, then maybe the payment of the income taxes are necessary to incur. It is a decision to be decided based upon the cost incurred versus the benefit to be received. You make that same decision every time you buy a hamburger or a glass of milk.
As an aside, I want to point out that the VA has no “look back rules” similar like the Medi-Cal system. So your mother can cash in her IRA, gift it away, and almost immediately thereafter qualify for the VA special pension benefit. However, you have to be careful with how you do this and to whom such gifts are made. For instance, a gift of assets to a family member living in the same household will result in the assets being considered as still owned by your mother. Further, making a gift which doesn’t violate the VA rules will often result in violating the Medi-Cal rules. So if a person qualifies for the VA benefit, but their illness progresses to the point that anything short of skilled nursing home care is inadequate, the gifting they made to qualify for the VA benefit may now prevent them from qualifying for Medi-Cal benefits.
Obviously, you need to speak to an attorney very skilled in both VA benefits planning as well as Medi-Cal benefits planning in order to carefully coordinate any action you take.