Achieving a Better Life Experience (ABLE) Act and Special Needs Trusts

Achieving a Better Life Experience (ABLE) Act and Special Needs Trusts Comparison

The ABLE act: A new way for clients with disabled children to save

With his signature on December 19, 2014, the president has paved the way for people with disabilities to open tax-free savings accounts where the money is exempt from the $2,000 limit on personal assets for individuals who wish to qualify for public benefits. A disabled person with more than that amount is generally ineligible for Medicaid and Supplemental Security Income benefits. These accounts can be created by individuals to support themselves or by families to support their dependents.

Modeled after 529 college savings plans, interest earned on savings will be tax-free. Funds accrued in the accounts can be used to pay for education, health care, transportation, housing and other expenses.

To be eligible, individuals must have a condition that occurred before age 26 and each person may only open one ABLE account. Under current gift-tax limitations, as much as $14,000 could be deposited annually.

People with disabilities may be able to start opening ABLE accounts as soon as 2015. However, some hurdles remain. While the new law alters federal rules to allow for ABLE accounts, each state must now put regulations in place — much as they have done for other types of 529 plans — so that financial institutions can make the new offering available.

“We can’t mandate that a state will create a 529, but given the lobby that we’ve seen, I think by the end of next year, I think we’ll see this in every state,” Sen. Richard Burr, R-N.C., one of the measure’s chief sponsors, said on a recent call with reporters.

The bill would create tax-exempt, state based private savings accounts to fund disability-related expenses to supplement benefits currently provided by Social Security, Medicaid, employers, and private insurance. The account shall be treated in the same way as a qualified tuition program, such as a 529. A 529 account allows families to save money for an individual’s education without being disqualified for certain aid programs and prevents tax penalties on the money saved and any income earned from it.

Expenses would qualify as disability-related if they are for the benefit of an individual with a disability and are related to the disability. They include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other expenses.

ABLE accounts will have no impact on Medicaid eligibility. Those receiving Supplemental Security Income (SSI) from Social Security shall have those payments suspended while maintaining excess resources in an ABLE account.

Key Characteristics of ABLE Accounts

From www.arcwestchester.org

· An eligible individual may have one ABLE account, which must be established in the state in which he resides (or in a state that provides ABLE account services for his home state).

· Any person, such as a family member, friend, or the person with a disability, may contribute to an ABLE account for an eligible beneficiary.

· An ABLE account may not receive annual contributions exceeding the annual gift-tax exemption ($14,000 in 2015). A state must also ensure that aggregate contributions to an ABLE account do not exceed the state-based limits for 529 accounts.

· Eligibility – An eligible individual is a person (1) who is entitled to benefits on the basis of disability or blindness under the Supplemental Security Income (SSI) program or under the Social Security disability, retirement, and survivors program OR (2) who submits certification that meets the criteria for a disability certification (to be further defined in regulations). An eligible individual’s disability must have occurred before the age 26.

· Designated Beneficiary – The eligible individual who established the ABLE account and who is the owner of the account is the “designated beneficiary”.

· Qualified disability expenses are any expenses made for the benefit of the designated beneficiary and related to his/her disability, including: education, housing, 1 After Stephen Beck’s death in December 2014, the law was named to honor him, a parent from northern Virginia who helped conceive and develop the ABLE Act and who worked tirelessly for its passage. 2 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.

· Tax treatment – Earnings on an ABLE account and distributions from the account for qualified disability expenses do not count as taxable income of the contributor or the eligible beneficiary. Contributions to an ABLE account must be made in cash from the contributor's after-tax income.

· Roll-Overs – Assets in an ABLE account may be rolled over without penalty into another ABLE account for either the designated beneficiary (for instance, when moving to another state) or any of the beneficiary's qualifying family members.

Federal Treatment of ABLE Account Under Means-Tested Programs, Including Supplemental Security Income & Medicaid:

· Means-Tested Programs generally – Assets in an ABLE account and distributions from

the account for qualified disability expenses would be disregarded when determining

the designated beneficiary's eligibility for most federal means-tested benefits.

· Supplemental Security Income (SSI): For SSI, only the first $100,000 in an ABLE

account will be disregarded. Assets above $100,000 will count as resources under SSI.

In addition, if the designated beneficiary’s ABLE account balance exceeds $100,000,

the individual's SSI benefits will not be terminated, but instead will be suspended until

such time as the individual's resources fall below $100,000. Further, it is intended

that distributions expended for housing purposes will receive the same treatment

which all housing costs paid by outside sources receive.

· Medicaid Eligibility: A beneficiary will not lose eligibility for Medicaid based on the

assets held in their ABLE account, even during the time that SSI benefits are

suspended (as described above for an account with over $100,000).

· Medicaid Payback Provision: Subject to certain limits and upon the state’s filing of a

claim for payment, any assets remaining in an ABLE account upon the death of the

qualified beneficiary must be used to reimburse the state for Medicaid payments it

made on behalf of the beneficiary. The amount of any Medicaid payback is calculated

based on amounts paid by Medicaid after the creation of the ABLE Account and shall

exclude amounts paid by the beneficiary as premiums to a Medicaid buy-in program.

https://files.ctctcdn.com/92d3c2d6001/b44c89ad-16b0-479d-b27e-0c562ffb72dd.pdf

SNTs and ABLE Accounts

BY: Darla Mercado of Investment News

TWO DIFFERENT VEHICLES

Though the intent of 529 ABLE accounts is the same as special-needs trusts — allowing disabled beneficiaries to qualify for Medicaid and SSI income benefits — how they'll accomplish that will be different.

Let's start with the limits applying to contributions and the size of the account. Special needs trusts can hold an unlimited amount of assets, but only the first $100,000 in the ABLE account will not be subject to the $2,000 personal asset limit that determines eligibility for receipt of SSI benefits.

Further, special-needs trust assets can be used to cover nonmedical things Medicaid otherwise wouldn't cover. These are called “supplemental” expenses. “You're allowed to have assets for things like haircuts, grooming, personal items that Medicaid doesn't pay for,” said Theodore J. Sarenski, a CPA and personal financial specialist with Blue Ocean Strategic Capital. Meanwhile, there are limits on the types of expenses an ABLE account can cover: education, housing, health care, prevention and wellness, and funeral expenses.

Beneficiaries who die with money in the 529 ABLE account will have to repay the public benefits they had received after opening the account.

Perhaps the most glaring difference between the 529 ABLE account and the special-needs trust comes down to the tax and cost implications of each.

TAX LANDSCAPE

Don't forget that trusts are subject to steep taxes for income that isn't distributed. Money that's going out of a special-needs trust is taxable to the beneficiary receiving it. Properly structured, income generated within the special needs trust won't be taxed at the top rate of 39.6%.

Meanwhile, money coming out of a 529 ABLE account is tax free if it's going toward a qualified disability expense. With Mr. Obama backing away from taxing 529 accounts altogether, at least we can be reassured that beneficiaries of 529 ABLE accounts won't have even more to worry about.

“The benefit [of the 529 ABLE] is that you avoid taxation, especially now that the president has dropped the idea of taxing the 529,” Mr. Sarenski said. “In the near future, you won't have to worry about taxation on 529s. But it's a tax law, and as we know, tax laws can change.”

TWO KINDS OF CONSUMERS

Tax experts envision two different kinds of consumers going for the special-needs trust and the 529 ABLE account.

“People who don't have the assets for a special-needs trust, middle-class taxpayers” might prefer the ABLE, said Mr. Steffen. Special-needs trusts require an attorney to draft the document, plus a trustee to manage the assets, so it'll make better sense for those clients who have that kind of money. Further, the ABLE account will likely have money going into it and coming out on a regular basis, while the special-needs trust is more of a vehicle for long-term assets.

Wealthier individuals, meanwhile, will find the tax-free benefits of the ABLE account to be even more beneficial. It's another way to provide for a disabled child's educational and housing needs while still locking in the benefits of Medicaid. Clients may even look into using a special-needs trust and a 529 ABLE account, the former for larger assets and supplemental expenses and the latter for near-term needs.

“These accounts solve different needs and different purposes,” Mr. Steffen said. “I don't see why they can't work together.”

http://www.investmentnews.com/article/20150202/FREE/150209991

Comparision Tables

By: P. Devan Culbreth

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