Trust Drafting After The VA Proposed Law Changes

Trust drafting afterva proposed law

changesbecome final

©2015. Lawyers With Purpose, LLC.1

• Victoria L. Collier, CELA, Co-Founder, LWP™ National Leader on Veterans Benefits Pension

• Dave Zumpano, Co-Founder, LWP™ Creator of the Trademarked iPug® Trusts

introduction


• Office of General Counsel

• Pension & Fiduciary Services Department Created April 2011

Dir. David R. McLenachen, appointed August 29, 2011

November 2011, Victoria Collier met with his entire staff• At that time, in the process of changes the laws related to

Transfers of Assets

Treatment of Trusts

Treatment of Annuities

Treatment of Home place Property

Deductibility of independent living facilities as medical expenses

• Because they saw a spike in Pension applications increase 25% from 2009 – 2010.

Background


• October 26, 2012, Fast Letter Issued By Dir. McLenachen, Pension & Fiduciary Services

Eliminating deductibility of room and board as an unreimbursed medical expense for independent living facilities

Progress


• Proposed Changes to Title 38 CFR, January 23, 2015 Imposing 3 year look back for gifts, up to 10 year penalty

Transfers to trusts subject to penalty

Conversion of funds to annuities subject to penalty

Home place exempt only up to 2 acres

Independent living facilities not deductible as UME

More progress


• Title 38 United States Code 1543(a)(1) Pension will be denied when the corpus of the estate of

the claimant is such that under all circumstances, including considering income of the claimant, it is reasonable that some or part of such estate be consumed for the claimant’s maintenance.

• Title 38 CFR 3.275(b) “corpus of estate” and “net worth” is the market value,

less mortgages, of all real and personal property owned by the claimant, except the dwelling and its reasonable lot area, and personal effects

• M21-1MR, Part V, Subpart I, Chp 3, Sec A, 1(c)

Current va laws regarding Net Worth


• Office of General Counsel Opinions

• Op. G. C. 30-57 (10-9-57) – if interest in property or income therefrom is retained, transfer will be disregarded (must be a complete divestment of all right, title, and interest in trust property).

• Op. G. C. 5-62 (3-2-62) – income from trust established by veteran for benefit of veteran’s child, with veteran as trustee, not attributable to net worth where there was a complete divestment by veteran of all right, title, and interest in trust property

VA guidance on trusts


• VAOPGCPREC 72-90 (7-18-90) – testamentary trust, purely discretionary, fbo veteran is not countable until it is actually allocated for claimant’s use (unless claimant possesses such control over the property that the claimant may direct it to be used for the claimant’s benefit).

• VAOPGCPREC 64-91 (8-9-91) – income only trust –when a veteran receives income as beneficiary of a private trust fund, where the trust instrument vests legal title to assets in a trustee (not the veteran), the trust assets are not included in net worth unless those funds are actually allocated and available to the veterans use (appears to be a 3rd party established income only trust)

More VA OGC Opinions


• VAOPGCPREC 73-91 (12-17-91) – Transfer of inherited assets to irrevocable income only trust fbograndchildren, held: It is essential to the creation of an express trust that the settlor (creator of the trust) presently and unequivocally make a disposition of property by which he divests himself of the full legal and equitable ownership. Id. Legal title to the property is vested in the trustee as a fiduciary of the trust, Chicago M & St. P. Ry. V. Des Moines Union Ry., 254 U.S. 196, 208 (1920), Sun First National Bank of Orlando v. United States, 607 F.2d 1347, 1357 (Ct.Cl.1979), with an equitable interest held by the beneficiary. 76 Am.Jur.2d Trusts§ 101. Where the settlor is trustee, the equitable interest must rest in another.

Assets not counted toward net worth for pension. • Great discussion on being eligible, then receipt of assets, then transfer, then

eligible again

More VA opinions


• VAOPGCPREC 15-92 (7-15-92) – Claimant owned property that he transferred remainder interest and retained a life estate. Court cited the prior trust cases as its authority and held: 38 CFR 3.276(b) requires that the transfer be disregarded for pension net worth because the life tenant retains an ownership interest in the property and retains the exclusive possession and control over the property during his or her lifetime. The entire value of the property is counted, not just the

life estate interest

VA Opinion on life estate


• VAOPGCREP 33-97 – self-settled special needs trust for benefit of claimant held to be countable.

• Specifically, “Assets transferred by a legally competent claimant, or by the fiduciary of a legally incompetent one, to an irrevocable “living trust” or an estate-planning vehicle of the same nature designed to preserve estate assets by restricting trust expenditures to the claimant's “special needs,” while maximizing the use of governmental resources in the care and maintenance of the claimant, should be considered in calculating the claimant’s net worth for improved-pension purposes.”

Last Trust Opinion


• MIT™ Home place property – exempt resource

• To maintain estate and income tax exclusion

Grantor is income beneficiary

Retain limited power of appointment

• Is this control and is there other ways to maintain step-up/121

NOT recommended for any other assets• However, the argument could be made that irrevocable, income

only trusts are exempt per 64-91 (but that seems to be a third-party trust, not self-settled)

• Concerns would be opinions 30-57 and 15-92 (life estate)

• Question also whether 33-97 brings in the “control” issue for all “living trusts” and not just SNT by merely establishing the trust

Current Use of lwp™ trusts


• TAP™/CGT™ All assets except home place

• Assets should be exempt per

5-62 – veteran set up trust fbo child; veteran was trustee

73-91 – veteran set up trust fbo grandchild; veteran was trustee

With my clients, the veteran is the grantor, the children are the trustees and income / principal beneficiaries.

• FIT® - ?

Current use of lwp™ trusts


• Lawyer submitted an income only trust with claimant as grantor and income beneficiary; trust funded with home place, stocks and CDs.

• Application filed 11/28/14

• Denied 12/5/2014 (7 calendar days; 5 work days)

• NOD filed 2/12/15

• Statement of the case 7/9/15. BASIS of DENIAL: all assets in the trust are countable

because claimant “receives net income of the trust.” No case law or general counsel opinions cited as authority.

Recent denial


• Federal Register, Vol 80, No. 15, Part IV

• Department of Veterans Affairs

• 38 CFR Part 3

• Net Worth, Asset Transfers, and Income Exclusions for Needs-Based Benefits; Proposed Rule 3.275 Counts lot sizes for home places that exceed 2

acres

3.276 Create 3 year look back for transfers• Defines “covered assets” subject to penalty as part of net worth which

was transferred for less than FMV and would have caused the net worth to exceed the permissible limits

• Defines Transfer for Less Than Fair Market Value

Includes transfers to trusts and annuities

Proposed changes to the laws


• MIT™ Should still be able to be used with NO penalty as long as

transferring only a home place with no more than 2 acres – this would not be considered a “covered asset” and thus, should not be subject to penalty

• TAP™/CGT™ Should not have to change any language of the current

trusts; but they will be subject to the look back and penalties

• FIT®

• Great trust to use. LWP will need to make one small change to language in the trust.

Lwp™ trusts after the laws change


• Self-settled trusts of any kind, other than MIT for home place property, would either be treated as: Countable assets (retained control or ownership interest)

OR

Transfer subject to penalty

• This MAY also include trusts set up by children on behalf of parents with money previously transferred to kids Strawman / 2-step transaction arguments

risks


• LWP™ trusts MIT™ and CGT™ are already designed properly with no necessary changes due to the impending VA law changes.

• BUT, the trusts must be funded properly and no inadvertent control or ownership given to grantor MIT™ only with home place

CGT™ everything else

FIT® everything else

conclusion


• Victoria L. Collier, CELA

• Dave Zumpano

• Co-Founders, Lawyers With Purpose

Thank you


Trust Drafting After The VA Proposed Law Changes

Law

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