Something that got buried this week with the extension of the tax cuts is something called an ABLE Account. ABLE is in acronym for Achieving a Better Life Experience Act of 2014. This bill is a GAME CHANGER for parents or caregivers that have a special needs child, or are taking care of a special needs person. These accounts are tax advantaged and mean hope for the millions of disabled in the United States.
We have always had something called Special Needs Trusts. How a trust works is that you have a Grantor, being the person making the trust. They write a legal document called the Trust Document. The trust can either be Revocable, meaning it can be changed, or Irrevocable, meaning it cannot be changed. The trust document appoints a Trustee, who is in charge of the trust. The trustee accepts the property that is given to the trust by the grantor. The trustee then administers that property, as outlined in the trust document, to the Beneficiary of the trust. The beneficiary is the person that benefits from the trust. In the case of a Special Needs Trust, the trust is irrevocable. Assets are given to the trust, usually by the parents of the special needs child, and those assets are used for the health and welfare of the child when the parents pass away.
There was a problem with this set-up. First of all, if the money made any money while it sat there (it is typical to invest the money that is in the Special Needs Trust), it was taxable to the trust, at not so favorable rates. Secondly, when it came time for the special needs child to apply for disability the assets in the trust counted against the special needs child. For instance, if a Special Needs Trust was set up and there was $200,000 in it, when the child went to apply for disability, this $200,000 would be counted against them, and they would lose some of their benefits, if not all of them. In addition, any money distributed to the child is taxable. ABLE fixes this mess.
Under ABLE, the tax situation for the trusts are fixed. The trust qualifies for a $4,000 exemption, unless income goes above $258,250. When the money is distributed to the child, it is no longer taxable provided it is used to pay for the child’s care. Further (and this is the best part), it is no longer considered an asset of the child when they go to apply for disability benefits. But wait there is more:
In addition to the trust being fixed, parents or caregivers with a special needs child, can set up additional ABLE accounts. A person can make nondeductible cash contributions on behalf of a designated beneficiary to a qualified tuition program (QTP, or 529 plan) established by a state. The earnings on the contributions build up tax-free and distributions from the QTP are excludable to the extent used to pay qualified higher education expenses. An additional 10% tax is imposed on distributions that are includible in gross income. The contributor can change the beneficiary, or roll over amounts from one QTP to another for the same or a different beneficiary who’s a member of the former beneficiary’s family, without tax consequences. The 2014 ABLE Act provides for a new type of tax-advantaged savings program, a qualified ABLE program.
The purposes of this program are:
… to encourage and assist individuals and families in saving private funds to support individuals with disabilities to maintain health, independence, and quality of life.
… to provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary’s employment, and other sources.
A qualified ABLE program is a program established and maintained by a state or an agency or instrumentality of a state that meets the following conditions:
(1) Under the program, a person may make contributions for a tax year to an ABLE account established for the purpose of meeting the qualified disability expenses (defined below) of the designated beneficiary (defined below) of the account.
(2) The program must limit a designated beneficiary to one ABLE account. If an ABLE account is established for a designated beneficiary, then no account established later for that beneficiary is treated as an ABLE account.
(3) The program must allow an ABLE account to be established only for a beneficiary who’s a resident of either the state that maintains the program (a “program state”) or of a contracting state that hasn’t established an ABLE program but has entered into a contract with a program state to provide the contracting state’s residents with access to the program state’s ABLE program.
(4) The program must meet the other requirements of Code Sec. 529A, as discussed below.
A qualified ABLE program must:
… provide that non-cash contributions and contributions that exceed the annual contribution limit won’t be accepted, see below under “Contributions to ABLE account.”
… provide separate accounting for each designated beneficiary.
… provide that any designated beneficiary may, directly or indirectly, direct the investment of any contributions to the program (or any earnings thereon) no more than twice in any calendar year.
… prohibit the use of any interest or any part of an interest in the program as security for a loan.
… provide adequate safeguards to prevent excess aggregate contributions, see below under “Aggregate contribution limit.”
Qualified ABLE programs are generally exempt from income tax, but are subject to the taxes imposed by IRC § 511 on the unrelated business income of tax-exempt organizations.
Qualified ABLE programs are subject to the excise tax on non-plan tax-exempt entities that are parties to prohibited tax shelter transactions and subsequently listed transactions.
The “designated beneficiary” of an ABLE account is the eligible individual (defined below) who established the account and is its owner.
Eligible individual
An individual is an “eligible individual” for a tax year if during that tax year:
… the individual is entitled to benefits based on blindness or disability under the social security disability insurance (SSDI) program (title II of the Social Security Act) or the SSI program (title XVI of the Social Security Act), and that blindness or disability occurred before the date on which the individual reached age or
… a disability certification (defined below) for the individual has been filed with IRS for the tax year.
A “disability certification” is a certification made by the eligible individual or the eligible individual’s parent or guardian to IRS’s satisfaction. It must certify that:
… the individual (i) has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or (ii) is blind, within the meaning of Sec. 1614(a)(2) of the Social Security Act
… that disability or blindness occurred before the date on which the individual reached age 26.
The certification also must include a copy of the individual’s diagnosis relating to the individual’s relevant impairment or impairments, signed by a licensed physician who meets the criteria of Sec. 1861(r)(1) of the Social Security Act.
The disability certification can’t be used to establish eligibility for SSDI, SSI, or Medicaid benefits.
The term “qualified disability expenses” means any expenses related to the eligible individual’s blindness or disability that are made for the benefit of an eligible individual who’s the designated beneficiary.
Qualified disability expenses include:
… 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
… other expenses that are approved under IRS regs and consistent with the purposes of Code Sec. 529A
Except for a rollover contribution from another account, a qualified ABLE program must limit the aggregate contributions from all contributors to an ABLE account for a tax year to the amount of the annual gift tax exclusion for that tax year. For this year and 2015 that would be $14,000. If you are married and elect to split your gifts you can contribute $14,000 and your spouse can contribute $14,000 for a total of $28,000.
This is excellent news for all of the parents and caregivers of special needs children. If you would like to discuss anything in this blog post please email me at: craig@cwseapa.com