The ABLE Act: What does it mean for your practice?

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1 The ABLE Act: What does it mean for your practice? Robert B. Fleming Fleming & Curti, PLC Tucson, Arizona

2 What is ABLE? The ABLE Act: Passed Congress in December Signed by President Obama on 12/19/14 Adds 529A to the Internal Revenue Code Modeled after IRC 529 plans Account balance excludable for purposes of eligibility for benefits (with some limitations) Still pending: Regulations (from IRS and SSA) State establishment of ABLE accounts (though some have acted see The ARC s state-bystate listing online)

3 Why ABLE? SNT alternative: disability advocates looking for less complicated planning tool than SNT Desire to lower costs and reduce need for extended attorney involvement Provides opportunity for IWD to open the account for him/herself

4 What is a 529 Plan? States permitted to create college savings plans 48 states and DC participate (not WA or WY, though WY contracts with CO) Some states have multiple plans States set maximum account size Multiple accounts for same beneficiary OK No federal requirement of residency Industry:

5 529 Plans Contributions subject to gift tax but up to 5X gift tax exclusion permitted in one year 529 account treated as out of donor s estate Donor can retain control, and even change beneficiaries No income tax benefit at contribution, but No tax on accumulation No tax on withdrawals, provided they are for qualified higher education expenses

6 ABLE Act Accounts Eligible Beneficiary entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act occurring before the date on which the individual attained age 26 ( 529A(e)(1)(A)) OR certification by beneficiary, parent or guardian to the same effect, under IRS regulations ( 529A(e)(2))

7 ABLE Act Accounts Payback Upon death of designated beneficiary, state Medicaid plan may file a claim against the account [ 529A(f)] State is a creditor, not a beneficiary Payback may be state-optional, since states may not be required to file claims Subject to any outstanding payments due for qualified disability expenses Payback includes 3 rd -party contributions Mechanics: does statute contemplate state simply debiting account?

8 ABLE Accounts: Modeled on 529 Plans, but Different Only one ABLE account per beneficiary ( 529A(b)(1)(B)) Multiple accounts? Only one qualifies Must be in state of residence But non-participating states can contract with states which have ABLE plan [ 529A(e)(7)] What if state does not adopt ABLE accounts or contract with another state? What if the beneficiary moves?

9 ABLE Account Dollar Limits Total contributions in a year limited to gift tax exclusion amount ($14,000 in 2015) [ 529A(b)(2)(B)] Total contributions over time limited to state s 529 maximum [ 529A(b)(6)] Lowest: $235,000 in GA, KY, MI, MS & TN Highest: $452,210 in PA $100,000 limit for SSI benefits (includes earnings), but not for Medicaid [ 103(a)(2) of the Act]

10 ABLE Accounts Income Taxes No income tax benefit on contribution, but growth in ABLE account untaxed Withdrawals tax-free if for qualified disability expenses : education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses and others approved by IRS regulations [ 529A(e)(5)]

11 Miscellaneous ABLE Rules Contributions must be cash (presumably meant to exclude in-kind stock transfers, not checks) [ 529A(b)(2)] Rollovers permitted to family member who is also disabled [ 529A(c)(1)(C)] Qualified disability expenses may be reimbursed including to beneficiary [ 529A(c)(B)] 10% surtax on distributions other than for QDE (plus inclusion in beneficiary s taxable income) [ 529A(c)(3)(A)]

12 Miscellaneous ABLE Rules Limited ability to direct investment decisions (2X/yr max) [ 529A(b)(4)] Gift tax effect to donor: completed gift of present interest [ 529A(c)(2)(A)(i)] Bankruptcy exclusion if contributions made a year in advance by parent, stepparent, grandparent or step-grandparent [new 11 USC 541(b)(10)]

13 Planning: Where ABLE Might Fit Small amounts of 1 st party monies Control for competent beneficiaries Accumulation of wages over time Transfer of UTMA accounts at 18 to qualify for SSI/Medicaid Save for purchase of home or car or wedding expenses.. Disability has potential to resolve No available or competent d4c entity Possible two-step 3 rd -party funding for ISM items (like housing costs)?

14 ABLE Might Be Attractive when Avoid testamentary trust reformation Not quite ready to spend down waiting for new van to be custom made Low income beneficiary savings plan States with onerous oversight of SNT rules In conjunction with larger SNT or pending litigation result Where $$ are small and clients will never understand SNT rules When rules are promulgated, fleshed out, tried out and the ABLE account option fits the facts

15 What Could Possibly Go Wrong? Third party fund payback (even for 3 rd -party $$) More than one account established; overfunding Failing to limit to qualified disability expenses Failing to report to state Loss of SSI relationship to Medicaid Educated choice between alternatives Confusion between SNT and ABLE rules effect of ABLE distributions to beneficiary on SSI? Protection from fraud, undue influence, exploitation, bad choices Child support? Other creditors?

16 More Resources ABLE Act Passes We ll Tell You What It Means and The ABLE Act How Will You Be Able to Use It?, both available at Steve Dale s informative YouTube piece: Collection of materials at Steve Dale s site: