Updates on ABLE Accounts & Special Needs Trusts

Transcription

1 Updates on ABLE Accounts & Special Needs Trusts Mary E. O Byrne, MBA JD Baltimore County Bar Association O Byrne Law, LLC Estates & Trusts Section 1400 Front Avenue, Suite 303 February 28, 2018 Lutherville, MD mary@obyrnelawoffice.com 2018 Mary E. O Byrne, all rights reserved.

2 Background The Stephen Beck, Jr., Achieving a Better Life Experience Act1 (ABLE) Act was signed into law on December 19, 2014 after many years of advocacy and bipartisan work in both the House and Senate. Division B of Public Law Created a new section 529A in the Internal Revenue Code. In 2016, Maryland enacted its own ABLE program legislation; the program became operational in November 2017, complete with its own website 2

3 What is an ABLE Account? Tax favored account for people with disabilities, with some similarities to 529 College Savings Accounts. Account is an exempt resource for purposes of most means-tested federal and state benefits, with certain exceptions. Account income grows tax free so long as income is used for Qualified Disability Expenses ( QDEs ). Distributions from account are not countable income for benefits programs; distributions from income that are not for qualified disability expenses incur penalty and income tax; some distributions may become countable resources in the month following receipt. 3

4 ABLE Accounts break the green ceiling. ABLE accounts permit certain individuals with disabilities to accumulate financial assets in excess of $2,000 resource limit for SSI and Medical Assistance (Medicaid), which has been unchanged since

5 Who may have an ABLE Account? Individual must be eligible for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) on the basis of disability or blindness OR Individual or the person with signing authority must certify under penalty of perjury that the individual meets the following criteria: has a physical or mental impairment resulting in marked and severe functional limitations which can be expected to result in death or which has lasted or can be expected to last for at least 12 months, or blindness per SSA definition. The certification must include a copy of the individual s diagnosis relating to the individual s relevant impairment or impairments and signed under penalty of perjury by a licensed physician. Disability onset must occur before the age of 26. 5

6 Limits on ABLE contributions. Maximum contributions to an ABLE account in any one year are capped at the federal gift tax exclusion, currently $15, USC 529A(b)(2)(B). Certain beneficiaries capable of earning their own income may contribute additional funds equal to the lesser of their annual income or the federal poverty level of the prior year, currently $12,060. The beneficiary must be an employee for whom no contribution is made to a defined contribution plan, annuity, or deferred compensation plan for the taxable year in which they would like to contribute to their ABLE account. TAX CUTS AND JOBS ACT, PL , Dec. 22, 2017, 131 Stat 2054, Sec (a)(3). 6

7 Limits on ABLE contributions. Limit applies PER ACCOUNT, not per donor. Lifetime contributions are capped at state s College Savings Plan maximum: $350,000 in Maryland. 26 USC 529A(b)(6). 7

8 Limits on ABLE Account balances. When balance is over $100,000, SSI considers the account a countable resource and SSI is suspended. Suspension is not a termination of benefits. When balance goes back below $100,000, SSI can be reinstated. Medicaid eligibility is not affected by the balance, so Medicaid can continue despite an account balance over $100,000. STEPHEN BECK, JR. ABLE ACT OF 2014, Title I, 103 8

9 Who may establish an ABLE Account and have signature authority? Individual him/herself Agent under a power of attorney Guardian Parent Although federal statute permits parents to act regardless of the beneficiaries age, Maryland expressly ends the parent s signature authority when the individual reaches 18 unless the parent is appointed under a Power of Attorney or court ordered guardianship. 9

10 Who owns the ABLE Account? The individual who is disabled is the owner of the account and is referred to as the designated beneficiary. 10

11 Who may contribute to an ABLE Account? The designated beneficiary or any third party may contribute to an ABLE Account. Third party contributions are considered a completed gift for tax purposes. Maryland ABLE program allows a state tax deduction of up to $2,500, for single filers and $5,000 for joint filers, for contributions to an account under the state plan, with carry over for up to 10 years. 11

12 What are the other requirements for ABLE Accounts? Only one account per person. 26 USC 529A(b)(1). Account may be opened in home state or another state whose ABLE program accepts out of state enrollees. Contributions must be cash (check, money order or credit card), e.g., no securities. 26 USC 529A(b)(2). 12

13 Changes to ABLE Accounts under the Tax Cuts and Jobs Act In December, 2017 Congress passed the Tax Cuts and Jobs Act which included two sections which are meant to expand the benefits of ABLE accounts. Section or The ABLE To Work Act permits certain beneficiaries who are capable of earning their own income to contribute additional funds equal to the lesser of their annual income or the federal poverty level of the prior year, currently $12,

14 Changes to ABLE Accounts under the Tax Cuts and Jobs Act In addition, Section amends the Retirement Savings Contributions Savers Credit to include contributions to ABLE accounts made by the designated beneficiary so long as they meet certain requirements. The Saver s Credit is capped at the lesser of $2,000 for single filers or a percentage of your contribution determined by your income. Percentage of Contribution Included Income 50% $19,000 20% $19,001 $20,500 10% $20,501 $31,500 0% $31,501 14

15 Changes to ABLE Accounts under the Tax Cuts and Jobs Act Section or the ABLE Financial Planning Act, permits the rollover of funds from a 529 college savings account to an ABLE account without incurring a tax or penalty. Rollover contributions are subject to the contribution cap set at the federal gift tax annual exclusion amount, currently $15,000. So must be counted together with any other contributions in the same tax year. 15

16 Medicaid payback required from ABLE Accounts After death of beneficiary, the State may request reimbursement for medical assistance benefits provided to the qualified beneficiary subject to these limits: Before reimbursement, the following may be paid: Any outstanding bills for QDEs and Funeral and burial expenses Excludes amounts paid by the designated beneficiary as premiums to a Medicaid buy-in program (e.g., Medicaid Expansion under ACA, Employed Individuals with Disabilities) 16

17 Scope of Medicaid Payback Reimbursement to State Medicaid programs limited to benefits provided after the date of account opening. 17

18 Maryland ABLE Program Maryland ABLE Program enacted April 13, Overseen by the Maryland 529 Board, formerly the Maryland College Savings Plan Board. Contributions are state tax deductible up to $2,500 for single filers in Maryland and up to $5,000 for joint filers. Maryland partnered with the state of Oregon through an intergovernmental purchasing agreement to create a stronger, larger program. Cash contributed to an ABLE savings account is held by The Bank of New York Mellon in an FDIC insured account. The Maryland ABLE program also offers three levels of investment focused accounts. 18

19 Maryland ABLE Program There is a $35.00 annual fee for each Maryland ABLE account. There are also fees on the underlying mutual funds for investment ABLE accounts as well as an administrative fee. The Maryland ABLE website lists these fees as being between 0.30% and 0.38% of the account s balance per year. Additional fees may apply when: The participant chooses to opt out of electronic statements; or Requests a withdrawal check. 19

20 What States have ABLE programs now? 31 states and the District of Columbia have ABLE programs up and running today: Alabama Iowa Missouri Oregon Alaska Kansas Montana Pennsylvania Colorado Kentucky Nebraska Rhode Island District of Columbia Louisiana Nevada South Carolina Florida Massachusetts North Carolina Tennessee Georgia Maryland New Hampshire Vermont Illinois Michigan New York Virginia Indiana Minnesota Ohio Washington 20

21 What are Qualified Disability Expenses? Any expenses made for the benefit of the designated beneficiary and related to his/her disability, including: 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 other expenses, which are approved by the Secretary of the Treasury under regulations. 26 USC 529A(e)(5). 21

22 Qualified Disability Expenses Qualified disability expenses should be broadly construed to permit the inclusion of basic living expenses and should not be limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. From IRS proposed regulations 80 FR (June 22, 2015) 22

23 What if funds are spent for non- QDEs? Tax consequences: designated beneficiary pays tax on the earnings withdrawn, plus 10% penalty. Example: You contribute $900 to your account in a calendar year. During this year your account earns $50 in income. You withdraw $950 but do not use for QDEs. What result? You pay regular income tax on the $50, plus 10% of the $50 or $5 in penalty. 23

24 SSI income treatment of ABLE Accounts POMS SI Exclude contributions from a third party to an ABLE account from the beneficiary s income. Exclude ABLE account earnings from beneficiary s income. Do not count ABLE account distributions as income. Individual s own income still countable as such, even if it is deposited in an ABLE account. 24

25 SSI resource treatment of housing expenses paid from ABLE Accounts Housing expenses for purposes of an ABLE account are the same as they are for inkind support and maintenance purposes, except for food. QDEs for housing are payments for: Mortgage (including property insurance required by the mortgage holder); Real property taxes; Rent; Heating fuel; Gas; Electricity; Water; Sewer; and Garbage removal. 25

26 SSI resource treatment of housing QDEs If the qualified beneficiary is on SSI, and withdrawal was for housing QDEs, then withdrawn ABLE funds that are not spent before the end of the month will be counted as resources in the following month. 26

27 SSI resource treatment of non-housing QDEs If withdrawal was intended for non-housing QDEs, but funds are not spent by the end of the month of withdrawal, then the withdrawn ABLE funds are not counted as resources in the following month. 27

28 SSI Treatment of non-qde withdrawals If withdrawal was intended for non-qdes, then funds not spent before the end of the month will be counted as resources in the following month. 28

29 QDE Summary QDE s Transportation Employment Training and support Assistive technology and related services Health Prevention and wellness Financial management and administrative services Legal fees Expenses for ABLE account oversight and monitoring Funeral and burial Housing QDE s Mortgage (including property insurance required by the mortgage holder) Real property taxes Rent Heating fuel Gas Electricity Water Sewer Garbage removal Basic living expenses 29 POMS SI

30 Advice for beneficiaries Spend funds withdrawn for housing QDEs and non QDEs in the month of withdrawal to avoid resource counting issues. SSI and Medicaid do not include in resource calculations funds committed by a check written before the end of one month but not cashed before the first of the next month. 30

31 SSA treatment of ABLE Accounts SSA has determined that the following will be counted as income to the beneficiary for SSI: Child support paid to an ABLE Account. Structured settlements paid to an ABLE Account. Income of the designated beneficiary placed into an ABLE account even if covered by the ABLE To Work Act contribution increase. 31

32 Can you rollover an ABLE Account? You have 60 days to roll over to another ABLE Account for the benefit of: the same designated beneficiary or an individual with a disability who is a sibling of the beneficiary. 32

33 Tax reporting issues Proposed regulations in IRS Notice (November 20, 2015) provide: ABLE program will not be required to track or report the use of distributions from an ABLE account. ABLE program will not be required to request the Social Security number or other tax identification number (TIN) of each third party contributor. ABLE program will not be required to review or keep a physician diagnosis, but can rely on the certification under penalties of perjury, and that the signed diagnosis will be retained in case of audit. Taxpayer will be expected to retain required documentation for audit purposes. 33

34 Tax reporting issues The Consortium for Citizens with Disabilities is concerned that the ABLE To Work Act increases the risk that an ABLE account owner will lose their benefits. The ABLE To Work Act may also complicate the process of maintaining records and preventing contributions over the limits which, under the Act, has been placed on the account owner with a disability. 34

35 Uses for ABLE Accounts? Payment of housing expenses for beneficiary and avoiding ISM reduction. Protect accumulated earnings or other income which is not spent down monthly. Small inheritances or crowdfunding donations. Helping beneficiaries learn to manage their own funds. Transfer UTMA accounts when beneficiary approaches age of attainment. Under recent changes in Maryland law, guardians and custodians may establish and fund ABLE accounts without a court order. E&T Sec (c)-(d). 35

36 Uncertainties with ABLE accounts Can distributions from ABLE accounts be used for recreation or travel? i.e. Therapeutic horseback riding sessions would be covered under the QDE umbrella but would a trip to Pimlico to see the ponies be covered? 36

37 ABLE Account pros and cons Pros: Account grows tax free Individual can establish account and control use of funds. Formal disability determination not needed. Low cost to establish. Avoid ISM issue for housing expenses. No upper age limit. Cons: Only available to people who became disabled before 26 Only one account; limits on annual contributions. Medicaid payback. Fees for account management. Individual responsible for tax documentation. 37

38 ABLE Accounts and Third Party Special Needs Trusts We can use them all our toolkit is growing Third party trusts are still good options for long range planning. No contribution limits. Qualified Disability Trusts offer income tax benefit. No payback to Medicaid (except for sole benefit trusts under 42 USC Sec. 1396p( c)(2)(b)(iii) & (iv). No disability status requirement. Settlor/trustee determines how trust can be used. Trust can distribute into an ABLE account. Child support can be deposited without counting as income to the beneficiary No limitations on the types of property (real property, securities, retirement accounts). 38

39 ABLE Accounts and Self-Settled Special Needs Trusts Self-settled special needs trusts have no limit on annual or lifetime contributions. Few restrictions on distributions except that they must be for the sole benefit the beneficiary. No limit to age at onset of disability, but a stand alone self-settled trust must be established and funded before the beneficiary reaches age 65. Already have a state payback for stand alone trusts, and pooled trusts offer option to allow non-profit to retain account assets at death of beneficiary. Self-settled trusts can distribute to an ABLE account. 39

40 Questions? Thank you! 40

41 Law and Regulations Division Q, Title III Sec. 303, Consolidated Appropriations Act 2016 (P.L , December 18, 2015 ) amending IRC Sec. 529A m) IRS proposed regulations 80 FR (June 22, 2015) IRS Notice (November 20, 2015) Maryland ABLE Act bject3&ys=2016rs&id=hb0431 Tax Cuts and Jobs Act SSA POMS SI (Oct. 19, 2016) E&T Sec

42 Resources National ABLE Resource Center Website offers side by side comparison of state ABLE programs Maryland Department of Disabilities ABLE webpage Maryland ABLE Website offers information and disclosures related to the Maryland State ABLE program 42