Asset Protection Trusts for Veterans Benefits Planning (VA Trusts)

Update: Changes Effective 10/18/2018 
Effective October 18, 2018, new regulations (38 CFR § 3.261 – 3.660) go into effect that dramatically change the way VA Benefits Planning will be done. Most importantly, there is now a 3-year lookback period for assets that are transferred by gift to individuals or trusts. Please rest assured that Castro & Co. has already developed and confirmed new sophisticated planning methods that will allow you to secure the VA Enhanced Pension regardless of your assets and current net worth. These new planning methods are only known by our firm, so we urge other law firms throughout the U.S. to co-counsel cases with our firm or outright refer clients to our firm for a fee to the extent permissible under state bar rules. Contact us today.

What is an Asset Protection Trust

An Asset Protection Trust (“APT”) is a Trust to which you transfer your assets to reduce your net worth, but you still retain control over the assets. Normally, when you transfer assets to a trust, you have to give up control. However, the rules on ownership are different for income and gift/estate tax purposes. Therefore, it’s possible to have a trust that’s considered completed for gift/estate tax purposes yet considered incomplete for income tax purposes. When a trust is purposely designed to be that way, this is what the legal industry refers to as an “Intentionally Defective Grantor Trust.” It has been intentionally designed to be defective in the sense that it’s given different treatment for gift/estate tax purposes and income tax purposes. This means any assets transferred to the trust reduce your net worth but don’t have any income tax consequences, which is actually perfect for VA Benefits Planning.

The veteran will be the grantor of the trust but not the beneficiary; the veteran’s children will be the beneficiaries. The trust agreement provides rights and duties of the trustee so that the trustee can make discretionary distributions to the beneficiaries. By establishing the trust the veteran can have more control over how the assets in the trust are going to be distributed and used, although the veteran has no legal right to the trust’s assets.

For most veterans, their major asset is their residence. As long as the veteran lives in the home, it is not part of his or her net worth for Veterans Administration (“VA”) eligibility purposes; it is a “non-countable resource.” However, If the veteran qualifies for the monthly pension benefit and later sells the home the proceeds will disqualify the veteran from receiving any further Veterans pension benefits – until the veteran spends down to an allowable asset level.

How Do I Prevent this?

If the home was placed in an Asset Protection Trust prior to the VA application and later sold by the trustee, the sale proceeds would not jeopardize the veteran’s pension benefits.

Some advantages of Intentionally Defective Grantor Trusts include:

1. The trust can hold a veteran’s assets and residence;
2. The assets and home in the trust will not disqualify the veteran from VA benefits;
3. The trust can sell a veteran’s assets and or residence and keep the proceeds;
4. The proceeds will not disqualify the veteran for pension benefits or Medicaid during the lifetime of the veteran;
5. The proceeds from the sale of the residence will not be subject to estate recovery by Medicaid;
6. The trustee can sell the residence with the grantor still being able to take advantage of Internal Revenue Code § 121 – capital gain exemption up to $250,000;
7. At the death of the grantor, the trust assets will receive a stepped-up basis for income tax purposes; and
8. It will keep the assets out of the hands of irresponsible children.

What about Medicaid?

In the event that the Veteran's long-term care costs are greater than the Veteran's benefits income and his/her other income, then they will want to apply for Medicaid. Great care must go into Veteran's benefits planning so it does not affect the Medicaid benefits eligibility. Planning for Medicaid purposes should be considered at least 5 years prior to the need for Medicaid as any transfers of assets in the five years preceding the Medicaid application will be considered as part of that applicant’s assets.