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What is the Penalty for Gifting Assets with Aid and Attendance?

As of October 18, 2018, any potential applicant for Pension with Aid and Attendance who has transferred any assets for less than value could be subject to a penalty. The look back for gifting is 3 years but not beyond October 18, 2018.

VA Pension is a needs-based benefit and is not intended to preserve the estates of individuals who have the means to support themselves. Accordingly, a claimant may not create Pension entitlement by transferring covered assets. VA will review the terms and conditions of asset transfers made during the look-back period to determine whether the transfer constituted transfer of a covered asset. However, VA will disregard asset transfers made before October 18, 2018.

Before we began our discussion of asset transfers and related penalties, it is necessary to have an understanding of certain terms that VA has invented to cover these issues. Here are some important definitions relating to the look back, transfers and calculating the penalty period.

Look Back Period

Look back period means the 36 month period immediately preceding the date on which VA receives either an original Pension or Survivor Pension claim or a new claim after a period of non-entitlement. For a claim that is submitted after a period of non-entitlement, the look back starts from the date of that claim. A look back does not start from the date of An Intent to File.

Transfer for Less Than Fair Market Value

Transfer for less than fair market value means selling, conveying, gifting or exchanging an asset for an amount less than fair market value. It also means a voluntary asset transfer to, or purchase of any financial instrument that reduces net worth unless the entire balance of the asset can be liquidated for the claimant's benefit. In other words, if the claimant can recapture the value of the asset that was transferred – whether he or she wants to or not – then that value is considered not transferred and instead counts towards the net estate limit. Single premium immediate income annuities and trusts are considered transfers for less than value unless the funding of such instruments can be converted back to cash assets in the name of the claimant.

VA presumes that an asset transfer made during the look back period was for the purpose of decreasing net worth to establish Pension entitlement. VA does not recognize that such a transfer could have been done without knowledge of the Pension benefit or for reasons entirely unrelated to an application for Pension. Adjudicators will however, consider clear and convincing evidence that the transfer can be disregarded if the assets were moved as a result of fraud, misrepresentation or unfair business practice related to the sale or marketing of financial products or services for purposes of establishing entitlement to Pension. Evidence for the purpose of substantiating this exemption may include a complaint filed with state local or federal authorities reporting the incident. Nevertheless, the assets in question will still count toward the net estate limit.

Here's an example of a transfer for less than value. A veteran reported that he voluntarily purchased an irrevocable income annuity on August 19, 2019. The purchase price of the annuity was $200,000. The annuity pays $1,000 per month to the veteran for the life of the contract. On March 25, 2020, the veteran applies for Pension. As a result of this transaction the veteran cannot receive a return of his $200,000 annuity purchase because the annuity is irrevocable. The purchase of the annuity is a transfer for less than fair market value and will be used to calculate a penalty period.

Here is another example. A surviving spouse voluntarily purchased a trust for her grandson on December 5, 2018. The purchase price of the trust was $200,000. She did not purchase this trust with any knowledge of the Pension benefit. She has total control of the trust and has the ability to liquidate the trust at any time for her own benefit. On April 11, 2019, she applies for Pension. Since the applicant can liquidate the trust for her own benefit, this is not a transfer for less than fair market value. The value of the trust on April 11, 2019 is $197,000. This value must be included in the claimant's net worth.

Covered Asset Amount

A covered asset is an asset that was part of a claimant's net worth and was transferred for less than fair market value during the look-back period, and if not transferred, would have caused or partially caused the claimant's net worth to exceed the net worth limit. In other words, it is the amount of assets transferred in excess of the net worth limit. A trust established on behalf of a child of a Veteran that VA rated incapable of self- support should not be included as a covered asset if distributions of the trust cannot benefit the veteran, veteran's spouse or veteran's surviving spouse.

The covered asset amount is the monetary value by which a claimant's net worth would have exceeded the limit due to covered asset(s) alone if the uncompensated value of the covered asset(s) had been included in net worth.

Here's an example. The net worth limit is $129,094. The claimant's assets total $116,600 and his annual IVAP income is $0. The claimant transferred $30,000 by giving it to his friend one year prior to applying for Pension. This transfer was within the 36 month lookback period. As a result if the claimant had not transferred the $30,000, his net worth would have been $146,600, which exceeds the net worth limit. The claimant's covered asset amount is $18,939, because this is the amount by which the claimant's net worth would have exceeded the limit due to the covered asset. It is this $18,939 that will be subject to the penalty period.

Calculating the Penalty Period

The penalty period constitutes the following:

  • It is a period of non-entitlement due to the transfer of a covered asset(s) during the look-back period, but cannot exceed 5 years
  • It begins on the first day of the month following the date of the last transfer, and it is calculated by dividing the total covered asset amount by the monthly penalty rate and rounding down. The resulting whole number is the number of months VA will not pay Pension.
  • If a penalty period covers any portion of a liberalized legislation period, the claimant is not entitled to benefits for the entire liberalized legislation period. (See liberalization law at the end of this chapter)
  • Penalty periods end the last day of the last month of the penalty period so in accordance with 38 CFR 3.31, the payment date becomes the first day of the following month.

The divisor for the monthly penalty rate is ALWAYS the MAPR for a veteran with a dependent and with the aid and attendance allowance. It is the current annual rate in force on the effective date of the claim. This annual rate is divided by 12 and rounded down to the nearest whole dollar. This becomes the monthly penalty rate divisor. This monthly penalty rate is the same for all Pension claimants whether a single veteran, a veteran with a spouse or a single surviving spouse. For example, the monthly penalty rate for a claim with an effective payment of December 1, 2019 – the date that the MAPR increases for the year – is $2,266 for all claimants.

Claimants must apply during the last month of the penalty period to receive benefits with a payment date as of the first day of the month following the penalty period. If benefits are paid from the first of the month following a penalty period, the initial year also starts on the first of the month following the penalty period. Claims made after the expiration of the penalty period will be paid based on the date of claim. However, if the penalty period expires before the claim is processed, benefits can be awarded from the first of the month after the penalty period expired. There is no need for the claimant to resubmit a claim.

Here's an example of calculating the monthly penalty period. A surviving spouse applies for Survivors Pension on April 2, 2020. Her current net worth is equal to the net worth limit. In October and November of 2019, she transferred assets totaling $10,000. VA deems these $10,000 transfers ‘covered assets’ and penalizes her using the $2,266 divisor. The penalty period will begin on December 1, 2019, the month following the last transfer. The penalty period is $10,000 divided by $2,266 per month which results in 4.41 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 March 31, 2020. Since the 4-month penalty period expired before the date of her claim, benefits can still be paid from the original date of the claim in April.

In this example, the surviving spouse was really not penalized by having to wait to make her claim, because the penalty period expired before she actually filed her claim.

Please refer to the table of contents in the top right column of this page for more topics on Pension with Aid and Attendance.