Advanced VA and Medicaid Planning Techniques Dale M. Krause, J.D., LL.M. PAELA Winter Conference February 21 – 23, 2014 Bedford, PA

Your Presenter: Dale M. Krause, J.D., LL.M. 0 CEO of Krause Financial Services 0 Licensed insurance agent throughout the nation 0 Developer of specialized annuity products 0 Educator 0 Expert witness 0 29-years of elder law experience

What’s All This About Changes in VA Planning? 0 Numerous House and Senate Bills have been proposed that will change the face of VA planning if passed and enacted 0 Drafted in response to a Government Accountability Office report following concerns that unscrupulous organizations were recommending gifts and products that, “may not be appropriate for elderly veterans.” 0 Would impose a look-back period similar to what DRA did for Medicaid planning

What Changes Will a Look-Back Bring to VA Planning? 0 More questions than answers at this point 0 Look-back period will be 36-months 0 Will look-back be 36-months from the date of the gift or 36-months from the date of application? 0 Most likely from the date of application 0 Penalty will be calculated based on the anticipated monthly pension benefit 0 Maximum penalty will be 36-months

What Does This Mean For Us? 0 Unless client’s made gifts prior to planning, it doesn’t change much of what we do. 0 Here’s why……we don’t recommend gifts!

VA Case Study

Meet Charles Miller 0 79-year-old widower 0 Korean War veteran 0 Recently lost his wife – primary caregiver 0 Sold the family home - $155,000 in savings 0 $1,200 in monthly income 0 Entered an assisted living facility – charging $3, per month for his care

What is Charles Worried About? 0 Despite medical condition, Charles has longevity 0 Concerned with running out of money - current life savings will only last for 41 months 0 Does not want to be evicted from assisted living – forced into nursing home

What is Charles Not Worried About? 0 He is not worried about leaving anything to his three children 0 He believes that they are all financially stable.

Charles’ Monthly Expenses UMME $4,236 Assisted Living - $3, Medicare Part B - $ Medicare Supp. - $ Other $ Cable Television - $71.94 Cell Phone - $76.60 Automobile Insurance - $52.13 Entertainment & Incidentals - $ Total Total Monthly Expenses - $4,664.43

Charles’ IVAP Income for VA Purposes Income $1,200 UMME $4,236 IVAP ($3,036)

What Does the VA Plan Look Like? All the Above Equate to Charles’ Life Savings - $155, Month Level-Pay Immediate Annuity - $102,500 Retain Assets in Savings - $30,000 Pre-Paid Funeral Plan - $10,000 Outstanding Bills - $5,000 Estate Plan - $7,500

Level-Pay Immediate Annuity Single Premium Period Certain Monthly Payment Total Payout $102,50061 Months$1,706.43$104, With Charles being 79 years of age, he has a Medicaid life expectancy of 8.41 years/ months. The period certain was determined based on Charles’ monthly income need, but stayed within his Medicaid life expectancy.

VA Eligibility Total Monthly Income $2, UMME $4, IVAP ($1,329.57) VA Pension Benefit $1, Excess Income $428.43

Why is there Excess Income? 0 Excess income created by the plan is identical to Charles’ non-medical monthly expenses Cable Television$ Cell Phone$ Automobile Insurance$ Entertainment & Incidentals$ $428.43

Economic Results 0 Charles has total monthly income of $4, Charles has total monthly expenses of $4, No need to take from $30,000 retained in savings 0 Can be used for increases in cost of care 0 Will not accumulate excess monthly income

Advantages of the Plan 0 Charles passes after residing in the assisted living facility for 45 months 0 $79,110 of VA benefits received 0 Maintained control of his money throughout his lifetime and received the care he needed 0 Ultimately provided a wealth transfer of $47, to his children 0 $27, remaining in his annuity 0 $20,000 remaining in his savings account

Does Charles annuity need to be DRA compliant for VA Planning? 0 No. 0 The VA does not require that an annuity be irrevocable as to the parties, non-assignable, or name a certain beneficiary

Contingency 1 – Nursing Home 0 Assume Charles enters a nursing home in month 45 rather than passes away 0 He wants to immediately qualify for Medicaid benefits or “Merge onto the Medicaid Highway” 0 Charles has two options: 0 Option 1: Sell his annuity on the secondary market, or 0 Option 2: “Flip the switch” and make the annuity compliant with DRA

Option One: Selling the Annuity 0 Step 1: Sell the annuity to a family member or on the secondary market – J.G. Wentworth 0 Step 2: Proceed with a Gifting/Medicaid Compliant Annuity Plan utilizing annuity sale proceeds and funds left in his savings 0 Step 3: Apply for Medicaid and be deemed ineligible due to gift, knowing eligibility will exist thereafter

Option Two: “Flipping the Switch” 0 Step 1: Reduce savings account to $2,000 through the purchase of a Medicaid Compliant Annuity 0 Step 2: “Flip the Switch” and convert his current annuity into a Medicaid Compliant Annuity - name the state as primary beneficiary, and make the annuity irrevocable and non-assignable 0 Step 3: Apply for Medicaid and be deemed eligible – co-pay equals social security and annuity income, less a personal needs allowance and any supplemental insurance

But Won’t the Immediate Annuity be an Uncompensated Transfer for Medicaid Purposes? 0 If the “switch” is flipped before the Medicaid application is made, the Medicaid office sees an annuity that is: 0 Irrevocable 0 Non-assignable 0 Actuarially sound 0 Provides equal payments 0 Designates the Medicaid agency as a beneficiary 0 Meeting the requirements of the Deficit Reduction Act of 2005, the purchase will be deemed a compensated transfer

Contingency 2 – More Assets What if Charles had $202,500 to invest into an annuity? Charles has total monthly expenses of $4, Charles has total monthly income of $4, Charles invests $38,900 into a 100-month balloon style annuity which pays him $28.90 per month – balloon of $37, Charles invests $163,600 into a 100-month level pay annuity which pays him $1, per month Charles still only needs income of $1, from an annuity

Pending VA Legislation 0 “VA may also consider the transfer of an asset, including transfers to an annuity, trust or other financial instrument or instruments, as a disposal of a covered resource for less than fair market value if it reduces the corpus of a veteran’s estate that could reasonably have been used for the veteran’s maintenance.” 0 This language in one of the proposed VA bills could be interpreted in two ways An annuity that is actuarially sound would not be a transfer for less than fair market value and with the planning technique just outlined, the corpus is still used for the veteran’s maintenance 0 2. The purchase of an annuity would create a penalty period no matter what

Recent Annuity Decision Zahner v. Machereth 0 On January 16, 2014, the United States District Court for the Western District of Pennsylvania held that a DRA Compliant Annuity with a term of 60-months was a legitimate, retirement- planning tool, while an annuity with a term less than 24 months was a sham-investment and a transfer for less than fair market value 0 Case is being zealously appealed 0 Worst case scenario – all annuities in PA Medicaid planning would need to be at least 24- months

How do I Learn More About Planning with These Products? 0 We offer complimentary planning for Medicaid and Veterans Benefits 0 Step outside and speak with Stuart to learn more about the planning techniques available to you and your clients, and grab a 2014 Krause Report