Shalloway and Shalloway, P.A.

Special Needs Trusts and VA Asset Planning

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Various means-tested pension benefits, such as the VA aid and attendance benefit, are available for veterans and surviving spouses that meet medical and financial eligibility criteria. Self-settled special needs trusts for individuals under the age of 65 and pooled special needs trusts are viable planning tools for satisfying VA financial eligibility rules when an independent trustee administers the trust and the VA recipient has no control over distributions and is not able to assert a claim to compel the trustee to disburse trust funds for support due to a discretionary support distribution standard.

SNT Assets may be countable for VA benefits that are means tested. SNT assets belong to the claimant if: 1) the assets is actually owned by the claimant, 2) the claimant possesses such control over the property that the claimant may direct it to be used for the claimant’s benefits or 3) funds have actually been allocated for the claimant’s use.

A general counsel’s opinion held that a special needs trust was considered an available resource and a part of the net worth of the VA claimant because the SNT beneficiary, a surviving spouse, naming an adult child as trustee was deemed to give the surviving spouse enough control to include the trust corpus as part of the claimant’s net worth for eligibility purposes.

Consequently if such a trust is to be established, one should not designate a household member of the claimant, dependent child, veteran or spouse as the trustee. It should instead designate a corporate or professional trustee or a non-dependent adult child living outside of the household of the special needs trust beneficiary.

Irrevocable trusts may be used in conjunction with application for pension benefits, but the trust cannot allow benefits from the trust to revert back to the applicant. Particularly, there should be no constructive income to the applicant from an asset owned by the trust. One method to avoid the issue is to gift the assets first, then have the recipient create the trust. The other method is to set up a grantor trust aka intentionally defective irrevocable trust. If the trust is designed properly, with certain defects outlined in the IRS code, the asset transfer is not considered a taxable event. For tax purposes, the property is still owned by the grantor of the trust. However, for VA purposes, the transfer is considered a true gift.

One significant benefit in making a contingent gift through a grantor trust is tax avoidance. Depending on the type of property, the transfer might be subject to capital gains taxation. This might be a piece of land, a stock or a business. Gifting property that represents a substantial capital gains in a future sale, during the grantor’s lifetime, means losing the step up in basis for the recipient of the gift. That recipient might have inherited the property at death and been able to apply the step up in basis to avoid most capital gains on the sale. Gaining the property through a contingent gift, provided in the grantor trust, means that the basis of the person giving the property has been passed on to the recipient.

Shalloway & Shalloway, P.A., is located in West Palm Beach, FL and serves clients in Palm Beach, Broward, Dade, Okeechobee, Martin and St. Lucie Counties.

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