Faithful readers may recall that last September I reported on an issue I thought to be of major importance to our community–the sale of irrevocable living trusts to veterans entering assisted living facilities or nursing homes to qualify for the VA aid and attendance (A&A) pension benefits. To refresh your recollection, A&A are pension benefits available to veterans and their families who served during a time of conflict and provide assistance to the extent that unreimbursed medical expenses exceed income. Because it is a needs-based benefit, the veteran and the veteran’s family cannot have much in the way of savings or assets. Thus, certain “veterans’ advocates” pitch to people considering moving into an assisted living or skilled care facility the idea of putting their “excess” wealth into irrevocable living trusts, the proceeds of which are then used to purchase high-commission annuities or other products. The consequences of intentionally and irrevocably effecting your own impoverishment can be brutal, particularly if the retired veteran dies leaving the surviving spouse without retired pay and with no ability to look to Medicaid for long term care.

I guessed that it was only a matter of time before the government, already overstretched in entitlement spending, would take a hard look at these arrangements. Well, it did. In a May 2012 report the Government Accountability Office issued report GAO 12-540, “Veterans’ Pension Benefits: Improvements Needed to Ensure Only Qualified Veterans and Survivors Receive Benefits.” The executive summary states that, in contrast to Medicaid, “VA pension claimants can transfer assets for less than fair market value immediately prior to applying and be approved for benefits.” The GAO remarked on one instance where a veteran worth more than a million dollars transferred his estate less than three months before applying and being approved for benefits.

The GAO identified over 200 organizations that marketed financial and estate planning services to help claimants with “excess assets” qualify for the benefits. Many of those used irrevocable trusts and then offered financial products such as annuities. Some of those products were deferred annuities, which “may not be suitable for the elderly because they may not have access to all their funds for their care within their expected lifetime without facing high withdrawal fees. A majority of the organizations they contacted (posing as a veteran’s family member) charged fees, ranging from a few hundred dollars to $10,000 to draft a trust. In my experience, while the counseling may be “free,” the commissions applicable to sale of the investment products can be steep. Real steep.

Unsurprisingly, the GAO took sharp exception to these practices, recommending: (1) the VA request information about asset transfers and income sources on application forms; (2) verify financial information; (3) strengthen coordination with VA’s fiduciary program; and (4) provide clearer guidance to claims processors. The VA concurred with those recommendations with the exception of (2), citing concerns with over-burdening applicants.

Most important, the GAO urged congress to take immediate action to establish a Medicaid-like look-back penalty period and to require that new applicants report any gratuitous transfers, disqualifying them from benefits if any such transfers took place within five years of the application. It’s hard to fault the reasoning. Needs-based entitlements are for the needy. Intentionally impoverishing yourself, even if it’s a wink-and-a-nudge irrevocable trust for the benefit of your children, permits the preservation of private wealth through public subsidy. Although I’ve never friended the GAO on Facebook, I share their outrage that my tax money is going to subsidize a millionaire’s preemptive bequest to his family.

What will happen in the near term is hard to say. Given the unblinking specificity of the GAO’s recommendations, it’s likely that there soon will be a look-back period for transfers. Until there is, though, I’m confident that the privateers in this industry will respond to the impending mortality of the fabled goose with grim determination to squeeze the last golden egg out.

So before you buy into one of these “veterans’ advocates” schemes and sign on the bottom line, for heaven’s sake seek the advice of an independent attorney. I stress the word “independent,” as the attorney to whom the advocate-cum-pitchman refers you to draft the necessary documents may not be, shall we say, sufficiently motivated to disclose the down-side of the plan. And in my personal experience, that attorney also may lack any practical understanding of the collateral consequences to the surviving spouse.