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My prior post, VA Planning - Transferring Assets after Eligibility has been Established, outlined the consequences a veteran will incur should he or she receive a lump sum of nonrecurring income, such as proceeds from a life insurance policy or an inheritance, after VA eligibility has been established.

However, I did not go into detail as to how the proceeds should be disposed of, and what the eligibility consequences will be thereafter.

Meet Sally Johnson.

If you recall from my prior post, Sally Johnson is a surviving spouse of a veteran, resides in an assisted living facility, and had already established Veterans Aid & Attendance ("A&A") eligibility.  Sally had $20,000 in liquid resources, unreimbursed monthly medical expenses of $3,000, monthly pension and social security income of $1,200, and received a monthly A&A benefit of $1,056.  For improved pension income eligibility purposes, when Sally received life insurance proceeds of $180,000 in March 2010, she had total monthly income of $16,200 beginning April 1, 2010:

$180,000 ÷ 12 Months = $15,000
+ Regular Income         = $1,200  
Total Monthly Income   = $16,200 > Unreimbursed Medical Expenses of $3,000

In that Sally's total monthly income will exceed her unreimbursed medical expenses, she anticipated her A&A benefit would be terminated the month following her receipt of the life insurance proceeds.  In that Sally received the proceeds in March 2010, her A&A benefit would be terminated from April 2010 through March 2011.

Sally Needs Income.

In order to supplement the loss of income from the termination of the monthly A&A benefit, Sally met with an elder law attorney and was instructed to purchase a Single Premium Immediate Annuity ("SPIA") that will provide her with $1,056 of monthly income, for 12 consecutive months.  The cost of the SPIA is $12,603.94.  Sally purchases the SPIA in March 2010, and the first payment will be made in April 2010.

Sally Transfers Assets.

Upon receipt of the life insurance proceeds, Sally's total countable resources increased to $200,000.  After retaining $30,000 of cash assets, and purchasing the SPIA, Sally was left with a spend-down amount of $157,396.06.  While Sally does not need to dispose of these assets immediately - she has already been determined ineligible for the following 12 months, Sally sees that investing the assets now will allow for a greater return given a guaranteed rate of interest.  As such, Sally's elder law attorney suggests that she transfer the remaining $157,396.06 spend-down amount into the Johnson Family Trust in March 2010.

Once inside the trust, the gift amounts will be held in a Single Premium Tax-Deferred Annuity ("TDA") which has a guaranteed interest rate of 3.00% over a two year term.  The advantages of using the TDA is that the Johnson Family Trust would not have to file any fiduciary income tax returns, the TDA offers a 15% annual free withdrawal(s), and the investment amount and any accrued interest is totally available to the Johnson Family Trust at the end of the two year period - without any surrender charges or penalties.

Note:  The grantor(s) and co-trustee(s) of the Johnson Family Trust would be the Johnson children.  The Johnson Family Trust could be a revocable or irrevocable trust, and would bear a federal identification number.  Additionally, before the co-trustee(s) can take any action regarding the TDA, the co-trustee(s) will need to secure a majority unanimous vote - which is dictated by the terms of the trust, and any intended action must be in writing and signed by the consenting co-trustee(s).

Note:  With the TDA owned by the Johnson Family Trust, at the two year maturity, it can be rolled over, tax-deferred, into another TDA.  Finally, in that this TDA is "annuitant driven," at the death of Sally - the annuitant, the TDA account value is immediately available to the Johnson Family Trust - without any surrender charges or penalties.

Advantage to Sally.

The advantage of this plan is that Sally will be in a position to meet all of her assisted living expenses over the next 12 months, while making a wealth transfer to her intended beneficiaries - the Johnson children.  Since income determinations under the improved-pension program are made on a 12-month basis, Sally may reapply for VA benefits in April 2011 and obtain the monthly pension benefit once again - assuming she is still income and asset eligible.