PLANNING FOR INDIVIDUALS WITH SPECIAL NEEDS PART 5
by: Begley Law Group
by Thomas D. Begley, Jr., CELA
This is the final part of a five-part series dealing with planning for individuals with special needs. Part 1 discussed the reasons to plan. Part 2 discussed the use of Self-Settled Special Needs Trusts (SSSNTs). Part 3 discussed Third Party Special Needs Trusts (TPSNT). Part 4 discussed Pooled Trusts. This article will focus on ABLE accounts.
The Congress enacted and the President signed legislation known as the Achieving a Better Life Experience (ABLE) Act of 2014. The Act is modeled on 529 Plans, and will provide tax-favored accounts for individuals with disabilities to pay for qualified expenses. New Jersey has adopted enabling legislation, but has not yet established an ABLE program. However, New Jersey residents can fund programs administered by other states. The most popular ABLE account is that administered by the State of Ohio.
The account can be opened by the disabled person or by a parent, agent under power of attorney, or guardian. The disabled person can be the account manager and decide on what distributions are to be made and for what purposes.
Highlights of the Act
- State Established or Contracted.Each state is authorized to establish and operate an ABLE program. This must be done by each state before these accounts can be opened in that state. States may contract with other states to operate these programs. If a state does not have an ABLE program, residents may join an ABLE program operated by another state.
- Contributions into an account must be in cash and may be made by any person, but are not tax deductible.
- Contribution Limit.Total annual contributions by all individuals to any one ABLE account are limited to the gift tax annual exclusion amount (AEA), which is $15,000 for 2018. The annual exclusion amount is indexed to inflation. Unlike the gift tax, this cap applies to the contributions made by all individuals, not just any single individual contributor.
- Non-Taxable Income.Income earned by the accounts would not be taxable, if properly distributed. These accounts would be similar to 529 Plans in that the income earned by the 529 Plan is non-taxable, if it is used for certain purposes.
- Qualified Expenses.Qualified expenses are expenses related to the individual’s disability, such as health, education, housing, transportation, training, assistive technology, personal support, related services, and expenses. Regulations will address this further.
- 10% Penalty.Distributions for non-qualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10 percent penalty on such portion.
- Medicaid Payback.Upon the death of the individual, amounts remaining in the account must be paid back to Medicaid. This is known as a Medicaid payback. The payback is only for medical assistance received since the inception of the ABLE account.
- Residual Beneficiary.After the Medicaid payback, the remaining funds would be payable to the deceased’s estate or to a designated beneficiary and would be subject to income tax on investment earnings, but not to the penalty.
- One Account.Individuals would be limited to one ABLE account, although an unlimited number of people could make contributions to that ABLE account.
- Age 26.Eligible individuals must be severely disabled before turning age 26. Individuals who become disabled after turning age 26 would not be eligible for ABLE accounts. Therefore, personal injury victims who sustain their injury after 26 will not be able to benefit from the ABLE legislation.
- SSI/SSDI.An individual does not need to receive SSI or SSDI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.
- Non-Countable.Individuals with ABLE accounts could maintain eligibility for means-tested benefit programs, such as SSI and Medicaid. The assets in the account are non-countable for federal means-tested benefit program eligibility purposes.
- Asset Limit.ABLE accounts have the same limits as 529 Plans, i.e., in New Jersey $305,000. However, if an ABLE account exceeds $100,000, any excess would cause a suspension of SSI until the account is reduced to $100,000 or below. It would appear that earnings in an account would constitute a portion of the account for purposes of determining the $100,000 cap. So, if an account had $100,000 in it at the beginning of the year and earned money during the year, the cap could be exceeded unless distributions were larger than the amount of the earnings.
- Housing Expense.Account distributions for housing expenses would not be counted as income for SSI purposes.
- SSI Suspension.If the balance of the ABLE account, together with the individual’s other assets exceeds $102,000, the individual would be suspended from eligibility for SSI benefits, but would remain eligible for Medicaid.
Situations Where an ABLE Account will be a Useful Tool
- Small Personal Injury Recovery.If an individual receives a small recovery from a personal injury, he or she may establish an ABLE account for up to $15,000. If the recovery is somewhat larger, perhaps a spend down strategy can be utilized in conjunction with the establishment of an ABLE account. If the settlement was higher than $15,000, it might be possible to have the defendant buy a structured settlement that would pay an amount of money, $15,000 per year or less, into the ABLE account over a period of time.
- If an individual receives a small inheritance, he or she can establish an ABLE account. Again, if the inheritance is somewhat larger than $15,000, the ABLE account could be used in conjunction with a spend down strategy.
- UTMA Accounts.Transfer of small UTMA accounts to ABLE accounts at age 18 to qualify for SSI or Medicaid.
- Structured Settlement. In personal injury cases involving a small settlement, a structured settlement could be considered. For example, a structure paying $15,000 a year for seven years could be used to fund the ABLE account. Care must be taken to avoid going over the $100,000 SSI cap. In larger settlements, a structure funding an ABLE account could be used in conjunction with a SSSNT.
- Conjunction with First and Third Party SNTs. Consideration should be given to establishing an ABLE account in connection with any TPSNT or SSSNT. These trusts should be drafted to include language authorizing the trustee to fund ABLE accounts.
- Over Age 64. A disabled individual over age 64, in a state that imposes a transfer of asset penalty on transfers to pooled trusts for individuals over 64, could establish an ABLE account so long as the disability occurred prior to age 26.