Estate and Tax Planning for Veterans

Tax Professionals' Resource
March 15, 2013 — 2,481 views  
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Very often veterans, who are also homeowners, will want to receive the Veteran's Aid & Attendance Benefit. However, it is possible that these veterans will be living in an Assisted Living Facility (ALF), and will need some money from home to fund the living expenses of the veterans at the ALF. This means that they will have to sell their house. This is where estate planning becomes important.

The Issues about Ownership

When the house is sold and proceeds received, any pension that a veteran had been receiving will be disqualified. This problem can be avoided by transferring ownership of the estates to their children before pension is applied for. The children can sell the house and use the payoff to help the veteran. However, this will mean that the capital gain exclusion will not be available for income tax purposes and the family will have to pay the additional tax. This puts the family in a predicament to either wait 8 months or more while marketing the home and apply to receive the aid and the attendance benefit, or apply immediately and pay the extra tax.

Living Trusts and Irrevocable Trusts

When an individual wants to receive the pension immediately and still avoid the extra tax, a trust of some type is the answer. However, using a regular trust or a living trust will not work. In a regular trust, the assets are still under the control of the veteran and are seen by VA (veteran affairs) as still being owned by the veteran. Assuming that the assets were more than the limit allowed by the VA, the veteran would be disqualified from the pension.

Irrevocable trusts place the assets out of the control of the individual and the qualification for pension goes uninterrupted. This helps in cases where the veteran has multiple children but desires for only one of them to manage his assets. This allows the veteran to protect the assets. However, though irrevocable trusts do not interfere in the qualification for VA pension, they do not help avoid the problem with income tax after the house is sold.

QVap Trusts as a Solution

One needs to find another kind of trust to tackle the income tax problem. To resolve this, QVap trusts were developed by adding various special clauses to avoid an income tax increase by providing capital gain exclusion without interfering in pension eligibility. There are also several other benefits for this. If the family were not sure on whether or not to sell the house, it would continue to be held by the veteran while receiving pension.

If the veteran has lost mental competence by the time a buyer is ready, a sale will be impossible due to delays caused by court procedures. It will also lead to additional expenses. With QVap, there will be no delay in the sale in case of mental incompetence as the sale of the house can be done without obtaining the signature of the veteran. In addition, if there was never a need to sell the house to raise money for the veteran's care, the children can put up the house for sale after the veteran’s death while avoiding any income tax on this pre-death capital gain. In addition, some control can be retained by the veteran on the children and the estates while he is alive.

Transfer of assets for veteran's benefit qualification requires meticulous planning in case of a need for Medicaid for the veteran. If the care needs increase, it is necessary that the veteran qualify for Medicaid, as veteran's benefits are typically insufficient for health care. Therefore, tax and estate planning for veterans is very important.

Tax Professionals' Resource