Impact of Tax Reform on ABLE Accounts and Special Needs Trusts: Guidance for Elder Law Attorneys

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Impact of Tax Reform on ABLE Accounts and Special Needs Trusts: Guidance for Elder Law Attorneys THURSDAY, SEPTEMBER 27, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Shannon Laymon-Pecoraro, Shareholder, Hook Law Center, Virginia Beach, Va. Kristin W. Shirahama, Partner, Bowditch & Dewey, Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 + Impact of Tax Reform on ABLE Account and Special Needs Trusts Shannon A. Laymon-Pecoraro, Esq. Shareholder at Hook Law Center, P.C. Kristin W. Shirahama Partner at Bowditch & Dewey LLP

6 + ABLE Accounts 26 U.S.C. 529A 6 Purpose: encourage accumulation of private wealth while providing a funding source for disability-related expenses Must be disabled or blind prior to age 26 AND (1) Receive SSI/SSDI OR (2) file a disability certification Contributions made by anyone: General limitations on contributions: Under pre-tax Cuts and Jobs Act law, contributions may not exceed combined aggregate of annual gift exclusion ($14,000 for 2017, $15,000 for 2018). New Law: After the general limitation on contributions is reached can contribute an additional amount, up to the lesser of (Code Sec. 529A(b)(2)(B)(ii)): A)the beneficiary s compensation for the tax year or B) the federal poverty line for a one person household (2018 $12,140 for the U.S. continental). Aggregate account limits set by states If aggregate account value exceeds $100,000 then SSI benefits will be suspended (not terminated) until account is below $100,000 Medicaid will be unaffected Medicaid payback

7 + ABLE Accounts (cont.) 7 Distributions must be for disability-related expenses Education Housing Transportation Employment training and support Assistive technology and personal support services Prevention and wellness Financial management and administration Legal fees Funeral and burial expenses Penalties: Too many contributions will result in account failing to be an ABLE account If withdrawals are not for qualified disability expenses, the earning portion of the account will be subject to regular income tax and a 10% penalty. States may also impose a penalty.

8 + Primer on Special Needs Trusts 8 First Party SNT Third Party SNT Established By Parent, Grandparent, Guardian, Court, Individual Third Party Funded By Assets of Beneficiary Assets of Third Party Beneficiary Person with Disability Person with Disability or Non- Disability Grantor Trust Permitted Permitted until Grantor s Death Medicaid Payback Required No Age Limit Under Age 65 None Grantor Trustee Prohibited Permitted Discretionary Yes Yes Inter Vivos Yes Permitted Testamentary No Permitted (Spouse Required) Revocable No Yes *Adapted from the Special Needs Trust Handbook published by Wolters Kluwer and written by Andrew H. Hook and Patricia Dudek

9 + Pooled Special Needs Trust 9 Can be First Party or Third Party Trustee is a Non-Profit Medicaid Payback OR Keep in Pool if First Party

10 + Trust Taxation Basics U.S.C. 102 Gifts and Inheritances Does not exclude the income from gross income Simple Trust required to distribute income annually Pass-through taxation Complex Trust discretion over distributions of income and principal Trust gets deduction for distribution of income IRC 662 distribution of property of the trust will be treated as distribution of income

11 + Filing a Return 11 File 1041 if gross income of $600 or any taxable income K-1 for beneficiaries receiving distributions Taxpayer is dependent upon the terms of the trust Grantor Trust Beneficiary Taxable income in trust over $12,500 is taxed at 37%

12 + Grantor Trust Rules 12 Designed to present abuses as a result of shifting income to individuals with lower tax brackets Helvering v. Clifford, 309 U.S. 331 (1940) IRC Income taxed to grantor

13 + Grantor Trust Powers 13 Reversionary interest IRC 673 Control beneficial enjoyment IRC 674 Power to apply income to support of Dependent Power affecting beneficial enjoyment after occurrence of an event Power exercisable by Will (Testamentary Power of Appointment) Power to allocate among charitable beneficiaries Power to distribute corpus to reasonably definite standard or to advance principal Power to withhold income temporarily Power to withhold income upon disability Power to allocate between principal and income Income for benefit of Grantor IRC 677 Certain administrative powers IRC 675 Power to dispose of corpus for less than FMV Power to borrow form trust as lower than market rate Power not to repay loan from trust by end of tax year Power of administration in a nonfiduciary capacity Power to vote stock Power to direct investments Power to require trust assets by substitution Power to revoke IRC 676

14 + Taxation of Special Needs Trusts 14 Most are drafted as Grantor Trusts Qualified Disability Trust deduction equivalent to personal exemption of beneficiary Check box for QDT QDT is: Taxpayer Self-Settled SNT is Grantor Trust so will not qualify Third-Party SNT is not a Grantor Trust after death Could be drafted to not be a Grantor Trust during life too Income beneficiary(ies) must be disabled

15 + Planning for Qualified Benefits 15 Roth IRA No penalty due to disability Liquidate/Transfer to SNT 401k PLR , , Inherited IRA rollover to SNT is okay because it is a Grantor Trust Use life of Beneficiary Logically, person s own IRA should be permitted to rollover to SNT PLR Transfer will be a distribution of income Did not even discuss Grantor Trust provisions Structure to take tax hit over years? Due to income limits, may not work Only option was to liquidate, take the income hit, and move balance to the SNT

16 + Funding Trusts with Qualified 16 Accounts Accumulation Trusts vs. Conduit Trusts No contingent beneficiary should be older than SNT beneficiary Descendants or Named Younger Beneficiaries Siblings All younger = no problem If large difference in ages, may be a problem $250,000 IRA 40 Years Old RMD is $5,734 $250,000 IRA 60 Years Old RMD is $9,921 Limit Power of Appointment to beneficiaries younger than the SNT beneficiary Payment of Debt and Administration Expenses of Trust Equivalent to paying to Estate 5 Year Withdrawal Limit to payment from retirement assets by September 30

17 + Qualified Accounts (cont.) 17 Treasury Reg. 1.40(a)(9)-4 Q&A-5(c) separate account rule Designate subtrusts - John Doe SNT under Jane Doe RLT Ultimate Beneficiaries Atom Bomb Beneficiaries Use a Charitable Remainder Annuity Trust (CRAT) Retirement Assets paid to CRAT for up to 20 years

18 + Tax Reform on ABLE Accounts Rollover Tax-free 60 day rollovers from a 529 account to an ABLE account. ABLE account must be owned by the designated beneficiary of that 529 account or a member of that designated beneficiary's family. Amount rolled over counts toward annual contribution cap. Any amount rolled over in excess of this limitation is included in distributes gross income. ABLE to Work If the beneficiary works, part of what is earned can be contributed to the ABLE account. If beneficiary s employer contributes to a workplace retirement plan, then the additional contribution to the ABLE account is not allowed. Under new law, total contribution for 2018 can be as much as $27,140 ($15,000 of regular contributions plus $12,140 additional contributions) Saver s Credit Beneficiaries who contribute to ABLE accounts can qualify for the Saver s Credit. Up to $2,000 of contributions qualify for modest income earners $31,500 AGI for Single filers $63,000 AGI for Joint filers Claimed on Form 8880, Credit for Qualified Retirement Savings Contributions Expire on January 1, 2026

19 + Tax Reform on SNTs 19 No effect on QDT status still gets exemption ($4,150) although beneficiary lost personal exemption due to higher standard deduction No change to Trust Exemption (Code Sec 642(B))- Simple Trust ($300) and Complex Trust ($100) Kiddie tax is now at trust and estate tax rate, not parents marginal rates with a standard deduction of $1,050. If beneficiary of QDT then income tax is based on tax table for single individual 2018 Trust tax rate maxed at 37% vs 2017 tax rate of 39.6% New SALT limitations ($10,000 cap) do not apply to Trusts

20 + POMS Updates 20 Tax reform did not impact interplay of tools, but 2018 POMS update did New Primary Benefit for the Sole Beneficiary standard under POMS SI F.3.a. Transfers for SNT to ABLE are excluded under POMS SI C.1.c. Distribution for food and shelter is not ISM under POMS SI C.4. May compensate family caregivers under POMS SI F.3.a.

21 + Interplay of ABLE and SNTs 21