An annuity is an insurance product that takes assets and turns them into an income stream. In very simplified terms, a lump sum of cash is paid, and in return, monthly income is received for a specified period. Also called an immediate annuity, the income stream was previously exempt from a veteran’s net worth (assets). It did, however, count as income and could have potentially caused a veteran to have too much income. Veterans who have income that exceeds the amount of the pension benefit are ineligible for benefits.
With the newer VA rules, moving assets into an annuity to lower one’s net worth violates the look back rule, given the annuity cannot be liquidated (cashed out). Remember, violating the look back rule can result in a period of VA pension ineligibility. If the annuity can be liquidated, the annuity in its entirety is counted towards one’s net worth. In addition, the VA https://paydayloanstennessee.com/cities/crossville/ counts income (minus eligible unreimbursed medical deductions) towards one’s net worth. Unfortunately, annuities no longer serve as a good vehicle to reduce one’s net worth.
A promissory note also takes assets and turns them into a monthly income stream. Prior to the newer rules, a promissory note allowed a veteran to give a loan to a third party, effectively lowering their net worth (assets) without jeopardizing their eligibility for VA pension benefits. The assets were no longer considered owned by the veteran, but instead owned by the borrower. e., an adult child or family friend) promises to pay the veteran an agreed amount of money, including interest, each month for a preset period of time. Unfortunately, promissory notes are a violation of the look back period unless the veteran can get their money back. If the veteran can get their money back, it counts towards their net worth.
An irrevocable trust, sometimes called a VA asset protection trust, is another asset protection strategy that was previously used to protect the proceeds from the sale of a veteran’s home. Irrevocable means the terms of the trust cannot be changed or terminated. Essentially, a trust is created, the proceeds deposited, and the veteran is no longer considered the owner of the money. Rather a trustee, who was named by the veteran, is considered the owner. Therefore, the money does not count towards the veteran’s net worth. However, with the newer VA rules, a trust violates the look back rule if it cannot be cashed out. If it can be liquidated, the trust counts towards one’s net worth. The only trust that does not violate the look back rule is one established for one’s disabled child. The child must be determined unable to support themself before the age of 18.
Words of Caution / “Spending Down” Assets
In the past, annuities and promissory notes have provided a way to turn net worth (assets) into an income stream, and therefore, provide a means to lower one’s net worth. Trusts, although extremely tricky and generally not recommended, were also a method that was occasionally used to lower one’s net worth. However, it cannot be stressed enough that with the change of VA rules on , these past methods of lowering one’s net worth are no longer advisable.
With the newer VA changes, it still isn’t entirely clear what asset planning strategies are ideal. However, one such option is to “spend down” excess assets on exempt (non-countable) services or items that are purchased at fair ples include paying for care assistance, purchasing a pre-burial plan, and even using extra assets to take a vacation. Furthermore, if Veterans can put promissory notes or trusts in place well in advance of the projected need for VA benefits (at least 3 years after implementation, missing the look-back period), these planning strategies might still be viable options.