The Veterans Asset Protection Trust can be an applicable and beneficial option for many of your elder law clients that are looking for long-term planning options. The Veterans Asset Protection Trust is an intentionally defective grantor trust and can be considered as an option for clients who are wartime Veterans or the surviving spouses of a wartime Veteran. This trust is designed to meet the eligibility requirements from the Veterans Administration (VA) of a complete gift or complete relinquishment.
When it comes to assets, the most significant for Veterans is typically his or her residence. As long as a Veteran retains that home, it does not count as part of his or her net worth for VA-eligibility purposes and instead qualifies as a “non-countable resource.” If a Veteran is collecting a monthly pension benefit, however, and later sells the home, those proceeds will disqualify him or her from receiving any further Veterans’ pension benefits. This disqualification remains intact until the Veteran spends the proceeds down to an allowable asset level.
This is where a Veterans Asset Protection Trust can come into play. If the residence was placed into the trust before the VA application and later sold by the trustee, the proceeds of the sale in that case would not jeopardize the Veteran’s eligibility for pension benefits. Should the Veteran need Medicaid benefits more than five years following the establishment and funding of the trust, the sum of money or property set aside to produce income for a named beneficiary (AKA the trust “corpus”) will not be part of the Veteran’s Medicaid application, and thus will not be a countable asset when applying for Medicaid.
Grantor and beneficiary roles
The Veteran is the grantor in this type of trust and his or her children are the beneficiaries. The trust grants rights and duties to the trustee so that person may make discretionary distributions to the beneficiaries. It is also advisable to recommend to your elder law clients that their trust agreement also includes the appointment of a trust protector. This person is someone who your client would grant the power to remove and replace a trustee that is not acting in the best interest of the trust or its intended purpose.
Although the name doesn’t suggest it, the Veterans Asset Protection Trust is also an asset protection option that can be used in the Medicaid environment. It’s a good option for clients whose primary goal is Medicaid Asset Protection. This is particularly useful in states that have issues regarding grantor trust status including Massachusetts and New Jersey.
Medicaid’s 5-year lookback applies
Because this trust can be used in the Medicaid environment, it’s important to note the potential implications of Medicaid’s five-year lookback period. Essentially, Medicaid can look back over a period of five years when running the financial analysis to determine whether or not a person qualifies for benefits.
Therefore, your client will need to create the trust, transfer the assets to it (fund the trust), and not require Medicaid benefits for at least five years. After the five-year mark, the client’s assets will be fully protected and will qualify for Medicaid.
If your client must apply for Medicaid before the five-year mark, then he or she can either be a private pay patient until the five-year mark is reached or Medicaid will assess a penalty period, where the client will not receive benefits. The length of the penalty period depends on the amount of assets transferred and the amount of time that has passed since the transfer.
A more conservative approach to asset protection
Overall, the Veteran Asset Protection Trust is a more conservative trust than some of the other types of asset protection trusts available. It provides all of the benefits of the Medicaid Asset Protection Trust, including the same tax benefits, but income generated is passed off to the lifetime beneficiaries of the trust instead of flowing through to the grantor in his or her individual income tax return.
I can't think of any lifetime powers that a Medicaid agency could look at in this Veterans’ trust and say, ‘oh, we have a problem with that,’” says ElderCounsel CEO Valerie Peterson. “It’s a more conservative trust, so if you are in a state that has said we don’t like certain lifetime powers, or certain grantor trust powers, then a Veterans Asset Protection Trust can be a great alternative, and obviously it would be used if you were trying to get somebody qualified — a Veteran or surviving spouse — for VA pension benefits.”
The Veterans Asset Protection Trust is just one of many documents offered in ElderDocx. If you’d like to know more about when Veterans Asset Protection Trusts should be recommended to clients, contact ElderCounsel today.
If you found this article helpful, you'll also want to read "When Should You Recommend the Medicaid Asset Protection Trust to Your Clients?."