How can One Meet Net Worth for Aid and Attendance Pension?

There appear to be several legitimate planning options to reduce net worth without incurring a penalty when applying for Aid and Attendance Pension. Although these are based on the regulations, we take no responsibility for their use.

WE TAKE NO RESPONSIBILITY AND WE ARE NOT LIABLE FOR YOUR LOSS IF YOU CHOOSE TO ADOPT ANY OF THESE CONCEPTS AND AS A RESULT ARE DENIED ENTITLEMENT TO BENEFITS. WE ARE SIMPLY LISTING IN THIS SECTION WHAT OTHER PEOPLE ARE DOING. WE DO NOT DO ANY OF THIS PLANNING OURSELVES. PROCEED AT YOUR OWN RISK.

Ways to Reduce Net Worth that Appear to Fit in with Current Rules

The ideas presented under this section appear to fit in with the current rules from VA concerning determination of net worth. However, because these rules have only been in effect since October 18, 2018, we don't know actually how VA would accept the concepts in this section. Therefore, proceed with caution at your own risk. We are not providing any legal opinions here for you to rely on nor are we asking you to rely on these ideas as planning that will actually be accepted by the Regional Office.

Purchases for Personal Products and Services

38 CFR §3.274 Net worth and VA Pension.
(f) (1) How assets decrease. A veteran, surviving spouse, or child, or someone acting on their behalf, may decrease assets by spending them on any item or service for which fair market value is received unless the item or items purchased are themselves part of net worth. See §3.276(a)(4) for the definition of "fair market value." The expenses must be those of the veteran, surviving spouse, or child, or a relative of the veteran, surviving spouse, or child. The relative must be a member or constructive member of the veteran's, surviving spouse's, or child's household. We have discussed in a previous section, this rule for allowing a reduction in net worth.

We also discussed what we think a constructive member of the household might be. Here are some ideas on how money could be spent to reduce net worth.


Please don't take this as a legal opinion because at this point we don't know what is allowable and what is not. It should also be noted that any purchases that would add to the assets for determination of net worth would simply be shifting money from one pocket to another and is not allowed in the regulation. For example purchasing a second home or a business or some other asset under this rule would not decrease net worth.

Increase Deductible Medical Costs

§3.274 Net worth and VA Pension. (f) How net worth decreases. Net worth may decrease in three ways: Assets can decrease, annual income can decrease, or both assets and annual income can decrease.

The net worth calculation is the sum of the market value of all assets plus IVAP. IVAP – "Income for VA Purposes" – is annual gross income of the household adjusted for deductible medical expenses. IVAP can never be less than zero dollars. But based on this calculation, there should be an attempt to reduce the IVAP to zero dollars if that is feasible. With personal care arrangements that we have discussed previously, this adjustment would not be that hard, because the care that is provided at home is probably not fully reimbursed under a personal care arrangement and thus there is latitude to increase the charge for that care based on a legitimate need.

If care services are being provided in independent living or assisted living or perhaps even a nursing home under certain conditions, a personal care arrangement could be considered in addition to the care being provided to increase the medical deduction costs. Finally, once someone is on claim, an attempt should be made to apply all deductible medical costs which were not available with the initial application.

Purchases of Personal Effects

38 CFR §3.275 How VA determines the asset amount for Pension net worth determinations. (b) Exclusions from assets. Assets do not include the following: (2) Personal effects. Value of personal effects suitable to and consistent with a reasonable mode of life, such as appliances and family transportation vehicles.

Under 38 CFR §3.274 for purchases in return for fair market value, purchases that trade one form of net worth for another are not allowed. Under this rule in 38 CFR 3.275 any purchases for personal effects would not be trading one form of net worth for another, because the value of personal effects are not considered part of net worth – they are excluded. VA does not elaborate on what it considers to be personal effects. Under the previous rule in effect before October 18, 2018, VA was a little more specific and included this description in adjudication manual M21-1 – V.iii.1.J.1.e.

"Normal household objects and possessions are not included in a net worth determination. Likewise, motor vehicles used for family transportation are not included in determining net worth, nor is the claimant's primary residence. However, personal property that is owned primarily as an investment, for example, an antique automobile or a coin collection, is included in determining net worth. The term personal property includes all tangible property that is not land (real property) or fixtures on land."

The current description in M21-1 for "personal effects" after October 18 is the exact language in the regulation above. We have no idea whether VA will consider the more detailed description of personal property which was part of the prior rules. We have to assume that they would likely take the same approach to what they now call "personal effects" and what they used to call "personal property." In lieu of any other interpretation, we would have to assume that personal effects include all household objects and possessions as well as motor vehicles and appliances. There is, however, no ban in the current rules on buying personal effects that could be considered an investment. We will simply have to see how VA interprets the new regulation. Here are some suggestions on what might allowably be purchased under this rule.


Please don't take this as a legal opinion as we don't know at this point what is allowable and what is not. You must be very careful here because if there is an application for Medicaid in the future, Medicaid is very strict on what can be purchased for personal use including a car. Perhaps all of the purchases listed above could create disqualifying problems with Medicaid.

Let the Penalty Period Run Out before Applying for the Benefit

This idea works if net worth is only slightly above the net worth limit. In fact, we will show how it works with an actual example that was taken from the Adjudication Manual M21-1. Here is the example from VA.

EXAMPLE: A surviving spouse applies for Pension on November 12, 2020. The claimant's net worth is equal to the net worth limit. The claimant transferred covered assets on February 2, 2019, and February 28, 2019, totaling $10,000. The total covered asset amount is $10,000, the monthly penalty rate is $2,230 (hypothetical rate on that date), and the penalty period would begin on March 1, 2019. The penalty period begins on March 1 because that is the month following the last transfer. The penalty period is $10,000 divided by $2,230 per month which results in 4.48 months. This is rounded down to 4 months which becomes the penalty period. If the result would have been greater than 4.5 months but less than 5 months, you would still round down to 4 months. The penalty period expires on June 30, 2019. Since the penalty period expires before the date of claim, benefits can still be paid from the original date of claim if the surviving spouse is otherwise entitled. In this example, the claimant was really not penalized by having to wait to make her claim, because the penalty period expired before she actually submitted her claim.

The important issue here is to trigger the look back penalty by transferring covered assets. If no assets had been transferred in this example and the net worth would have exceeded the net worth limit by $10,000, the claimant would have triggered the penalty at the point of application and would have been denied benefits even though otherwise entitled. The claimant would then have to wait 4 months before reapplying.

This particular idea should be a last resort to reduce net worth after applying all of the spending and medical deduction strategies we have outlined earlier in this section.

Start the Clock Ticking with the Penalty before Actually Being Entitled to Benefits

The goal of this idea is to start the clock ticking on the penalty period. This concept works where the potential claimant would not currently be entitled to benefits as there is no current need for health care or custodial care. As such there would be no rating for aid and attendance. The question may be asked here, without a need for care, what would motivate someone to preplan at this stage to be ready for a claim? Typically, when a potential claimant starts losing his or her independence and needs some limited assistance with IADLs, inquiries are made for veterans benefits – often online – or perhaps a member of the family attends a presentation about Pension. This is often the way people find out about the Pension benefit. This early inquiry can lead to the type of pre-planning we address here.

Here is how it works. Covered assets above the net worth limit will be gifted to a member of the family or someone else. Without this step, assets that are over the net worth limit would likely still be over the net worth limit when the need for care would arise in the future. If the claim were made when the need for care arises, the penalty period would be triggered at that point not earlier as with this strategy. Generally, this strategy would be a last attempt effort to reduce net worth after the other strategies have been employed, and there is still net worth remaining above the limit.

Let's look at an example of how this works. Mary is an 85-year-old surviving spouse claimant. She has $187,000 in a CD in her bank from the sale of her home. She is living in her daughter's home and her daughter Andrea is helping Mary with meals, shopping, laundry and assistance with paying her bills. Mary cannot yet qualify for a rating for aid and attendance.

Mary's gross income is $1,400 a month from Social Security and a survivor's retirement benefit from her deceased husband's retirement plan of $700 a month – a total of $2,100 a month. If she has a future need for care and can get a rating, she plans to submit a claim using a personal care arrangement with her daughter providing the care. Net worth is the sum of income plus assets minus adjustments for medical costs. That's why this strategy works best with the personal care arrangement, because Mary will utilize her entire income to pay Andrea and for VA purposes make her income zero. This strategy works well for home care situations where there is a family caregiver because the family caregiver will turn around and use the money she is receiving to pay for monthly maintenance costs and end up with an additional monthly amount from VA to increase the overall household income.

The net worth limit in effect on the date of her claim is $127,061 and the divisor for calculating the penalty period is $2,230 a month. Mary transfers $60,000 of her savings into an account owned by her daughter. This transfer now puts Mary's assets below the net worth limit of $127,061. The covered amount subject to penalty is $59,939. When Mary makes her application in the future, the first thing that VA will do is to calculate the penalty by dividing $59,939 by the penalty divisor of $2,230 a month which results in a penalty of 26.88 months which is rounded down to 26 months. (Please note here that this is only an example and the net worth limit in the future will likely be larger as well as the divisor due to inflation.) VA will not process the claim whether Mary is entitled otherwise until the penalty period has been met.

Mary will now be eligible to reapply for Pension within the 26th month after gifting the assets, assuming that her IVAP is zero dollars at that time. If she needs to apply sooner, perhaps within 15 months after making the transfer, she only has to wait 11 months to apply. Had she not used this strategy and had her savings likely remained around $187,000 and had she applied at 15 months from now without making a transfer, she would be facing roughly a 26 month penalty for having assets above the net worth limit – not the remaining 11 months from the transfer. By starting the clock ticking now, through gifting, when she is ready to apply, her remaining penalty period will be much less than 26 months.

Mary could also transfer more of her savings to her daughter to preserve assets in anticipation of applying for Medicaid. On the other hand, there is a 5 year look back on transfers for less than value for Medicaid and the penalty does not start on the date of transfer but on the date of application for Medicaid. If Mary wants to incorporate Medicaid planning with the approach we are discussing here for VA benefits, it is important that she works with someone who understands VA rules and Medicaid rules. Such an experienced person will make sure that Mary doesn't create a problem for herself if she ever applies for Medicaid.

Here is another note of caution for this strategy. Suppose that instead of $187,000 in assets, Mary had $280,000 in assets. And suppose that she transferred as a gift, $153,000 to her daughter reducing her assets below the net worth limit for assets only. Assume her IVAP is again zero dollars. The penalty would now be 68 months. Fortunately, the maximum penalty that can be imposed is 60 months. However, this is still an unwise move. She should not trigger the penalty if the penalty period exceeds the 3 year look back period. She can certainly gift the assets now, but she should not apply for benefits and trigger the penalty. Instead of triggering a 60 month penalty by applying, she would simply wait more than 36 months for the look back and then apply and there would be no penalty.

This particular idea should be a last resort to reduce net worth after applying all of the spending and medical deduction strategies we have outlined earlier in this section. Private Pay through the Penalty Period Unlike the strategy to trigger the clock on the look back period where there is currently no need for health care or custodial care, this idea is used to allow transfer of assets above the net worth limit to someone else while maximizing the amount of those assets and minimizing the penalty that is created. This idea works best for someone who is already in independent living or assisted living and paying out-of-pocket for that cost. It might also work for out-of-pocket costs for home care which involves a personal home care company that is paid for these services.

Consider this example. Martha, a widow, is 83 years of age, and is a resident of an assisted living facility. With countable assets of $250,000, she exceeds the current net worth asset limit by having covered assets of $122,938. This amount was determined by subtracting the current asset limit of $127,061 from Martha's countable assets of $250,000 and taking off one dollar more to get her under the limit. The assisted living charges $4,000 per month for her care, and with her monthly income being $2,200 a month from social security and a school district pension, she has a monthly income shortfall of $1,800. However, Martha would like to qualify for Pension benefits as soon as possible. In this example her IVAP is zero and the net worth calculation represents only the value of her assets.

The first step is to add Martha's monthly income shortfall of $1,800 a month to VA's penalty divisor of $2,230 a month. This amount is $4,030 a month and is called the monthly burn rate. The next step is to divide the covered amount of assets of $122,938 by the burn rate which results in 30.5 months. This is called the term of the plan which will also be the penalty period calculation that VA will impose and rounded down. The amount she can gift is determined by multiplying the term of the plan times the VA penalty divisor which results in an amount of $68,028. This gift of $68,028 will result in a penalty period of 30 months which is the same as the burn rate calculated above. She will use the $54,911 (the amount that she retained and did not gift) to pay for her shortfall of $1,800 a month for 30 months. After the 30 months, her net worth will be below the net worth limit of $127,061 assuming her IVAP is still zero. This will then allow her to apply for Pension with aid and attendance and without penalty.

Let's assume that with inflation, the Pension rate is $1,300 a month at the time of her application and that her assisted living cost has not increased. With the extra Pension income, she now has a shortfall of $500 a month instead of $1,800 a month. This is $6,000 a year. She will have to use part of her allowable assets of $127,061 (this will be more at that time due to inflation) to pay for this shortfall. Had the case involved a single veteran, he would have received about $1,900 a month after the 30 month penalty and he would have no shortfall at all.

It should be noted that if the penalty for using this strategy exceeds 36 months, the potential applicant would then gift the entire amount of covered assets and simply wait 36 months to make application. It is also important that if an application for Medicaid is anticipated, this planning idea must absolutely be integrated with Medicaid planning using someone who understands how to do this. Any gifting prior to application for Medicaid will likely result in a Medicaid penalty as well.

This particular idea should be a last resort to reduce net worth after applying all of the spending and medical deduction strategies we have outlined earlier in this section.

Involuntary Transfers from Retirement Plans

The idea here hinges on the portion of the regulation below and whether a so-called transfer for less than fair market value is VOLUNTARY or as the definition implies but does not state – NOT VOLUNTARY. Clearly a transfer that is NOT VOLUNTARY is exempt from this rule. This is based on input from the comment period when VA first proposed this rules change in January 2015. The final rules' proposal in September 2018 in the Federal Register discussed why the word Voluntary was used. We include that discussion from VA below to show that certain asset transfers are allowable under this rule.

§3.276 Asset transfers and penalty periods.
(a) (5) Transfer for less than fair market value means— (i) Selling, conveying, gifting, or exchanging an asset for an amount less than the fair market value of the asset; or (ii) A voluntary asset transfer to, or purchase of, any financial instrument or investment that reduces net worth by transferring the asset to, or purchasing, the instrument or investment unless the claimant establishes that he or she has the ability to liquidate the entire balance of the asset for the claimant's own benefit. If the claimant establishes that the asset can be liquidated, the asset is included as net worth.

Here is VA's discussion of this particular rule from the September 18, 2018 edition of the Federal Register –83 FR 47246

"Multiple commenters expressed that certain types of trusts and annuities should not be included in the definition of "transfer for less than fair market value." We agree that certain annuities and trusts should not be included as a transfer for less than fair market value. Thus, based on a number of comments discussed below, we are revising § 3.276(a)(5)(ii) to provide that a transfer for less than fair market value means a voluntary asset transfer to, or purchase of, any financial instrument or investment that reduces net worth by transferring the asset to, or purchasing, the instrument or investment unless the claimant establishes that he or she has the ability to liquidate the entire balance of the asset for the claimant's own benefit. We also provide that, if the claimant establishes that the asset can be liquidated, the asset is included as net worth.

Second, several commenters noted that some transfers to annuities are mandated upon retirement. The conversion of deferred accounts to an immediate annuity is required under some retirement plans. We concur with these comments and final § 3.276(a)(5)(ii) excludes mandatory conversions. This means that we will not count, as a covered asset, the amount transferred to such an annuity, although distributions from the annuity will continue to count as income."

There is no question that VA has given license to transfers from certain types of trusts and annuities that are exempt as being transfers for less than value. In addition, certain retirement plans also requiring conversion to an immediate annuity – when the retirement option is selected – are allowed. The question is, what are the criteria for determining these involuntary transfers and what types of plans fall under this exception.

We are aware of certain deferred annuities that by contract provision only allow withdrawal of assets through some sort of immediate annuity plan furnished by that insurance company. We are also aware of tax-sheltered annuities that are available to education organizations and nonprofit hospitals that have similar provisions. Whether other such deferred annuities or trust arrangements meet the definition of "not voluntary," we don't know the answer yet.

We also question whether required minimum distributions (RMD's) for IRAs and other tax qualified retirement plans might also fall under this exception. At age 70 ½, these tax qualified plans require minimum yearly distributions based on a calculation of life expectancy. But, the IRS also allows RMD's to be taken out of tax qualified plans as income annuities. The question is whether the requirement for an RMD is the non-voluntary part of the plan which results in a voluntary selection of either recalculating the withdrawal every year based on life expectancy or rolling the entire amount or a portion of the amount into an immediate income annuity.


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