Proposed regulations offer guidelines for new state – sponsored ABLE accounts for people with disabilities

Proposed Regulations Offer Guidelines for New State-Sponsored ABLE Accounts for People with Disabilities
IR-2015-91, June 19, 2015

WASHINGTON

— The Internal Revenue Service today released proposed regulations implementing a new federal law authorizing states to offer specially-designed tax-favored ABLE accounts to people with disabilities who became disabled before age 26.
The Achieving a Better Life Experience (ABLE) account provision was signed into law in December 2014. Recognizing the special financial burdens faced by families raising children with disabilities, ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses.
The new law authorizes any state to offer its residents the option of setting up an ABLE account. Alternatively, a state may contract with another state that offers such accounts. The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must have been disabled before his or her 26th birthday. The law provides what it means to be disabled for this purpose.
Contributions in a total amount up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expenses.  These are expenses that relate to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other expenses.
In general, an ABLE account is not to be counted in determining the designated beneficiary’s eligibility for many federal means-tested programs, or in determining the amount of any benefit or assistance provided under those programs, although special rules and limits apply for Supplemental Security Income (SSI) purposes.
The proposed regulations, available today for public inspection at www.federalregister.gov, provide guidance to state programs, designated beneficiaries and other interested parties on a number of issues. For example, the proposed regulations explain the flexibility the programs have in ensuring an individual’s eligibility for an ABLE account. They also indicate that the IRS will develop two new forms that ABLE account programs will use to report relevant account information annually to designated beneficiaries and the IRS — Form 1099-QA for distributions and Form 5498-QA for contributions.

Until the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.

The IRS welcomes comments. Comments must be received by Sept. 21, 2015, and may be submitted electronically, by mail, or hand delivered to the IRS. A public hearing is scheduled for Oct. 14, 2015, at the IRS Auditorium, 1111 Constitution Ave. NW, in Washington. See the proposed regulations for details on submitting comments or participating in the public hearing. More information can be found at Tax Benefit for Disability: IRC Section 529A.

Why do we ask so many hard questions?

Preparing a will or a trust is central to an overall estate plan.  Of course, there are lots of other documents too, but for the moment, what goes into the Will and Trust?  Answers to our questions … based on planning​ and thinking about the future; planning for both while you  are alive and after you die.

We ask a lot of questions.  Some are about you, and others are about your family.  How do you want to be treated?  How do you want to have your family protected?  What would you like to leave them?  Do you have people​ in your life who need special gifts?  O​r, special provisions?

These are hard questions … some have no immediate or easy answer.  We are patient!  It might take a revision or two to get it all the way you want it.  Don’t worry about all the details we ask about and subsequently put into the wills … everything is important.  If you don’t define it now … someone will argue about it later!

A recent example of this is the Robin Williams estate.  You can find a write up about it here and there on the Internet.  The second article is a great argument for the use of trusts in estate planning.  One question that is asked is if a renovation is considered upkeep on the house.  The question is, what doyou want it to mean?  We help define everything so that your family doesn’t have to argue about it after you are not there to help answer the questions.

Whomever you work with should be as detailed as possible.  So, we have to ask a lot of hard questions!​​  You won’t find our questions in an on-line will package.  And, if trusts are right for you even if you do not have an estate like Robin Williams, we are sure to include that planning in your overall estate plan.

Come see us!  Call us today!

Estate Planning Basics, Part 2 – Special Needs Trusts and IRAs for heirs

​In part 1, we wrote about life insurance beneficiaries.  In this part, we continue our mini-series about mistakes in planning related to beneficiaries.  This part discusses special needs trusts and a very short summary of IRA issues.

Part 2 – Trusts and IRAs for the children

A. So, how do you protect heirs and children with special needs? Can I just leave them a part of my estate?

Many families have one or more special needs person.  A child with a disabling physical problem is easy to recognize as having special needs, but there are other serious illnesses that are not so obvious, such as substance abuse.  As the person with assets, and decisions to make about life-time care for your loved one, you may wonder what can you do to protect her from the financial effects of her illness?

One way well- intentioned family members approach this is to designate the special needs individual as beneficiary of life insurance or other financial products, or as heirs of an estate plan.  It is what most people would do. But wait!  This might not work out as well as you’d like.  You could create several kinds of problems, including loss of public benefits and loss of the asset through mis-management.

First, your good intentions may disqualify the special needs child or troubled adult from various benefits and governmental assistance.  Many people with serious medical or mental conditions are receiving Supplemental Security Income (SSI) or disability income (SSDI).  Some are on Medicaid or other local benefits.  Your gift would likely put them over the asset limit and cause loss of benefits.  That isn’t what you wanted!

Second, your gift might be simply taken by creditors, or unwisely spent by the recipient.  You probably would like to help with housing or food costs for your troubled child or grandchild, but not to fund continued abuse or to provide a windfall for a creditor!

You can work this out by seeking the help of a qualified attorney who understands the needs of the families with loved ones with disabilities.  Careful attention to the details in your specific case will make the best outcome.  You can use a “supplemental needs trust” (“SNT”) or special accounts that support the child if you cannot.  The best approach is to integrate your desires with the child’s parents’ planning and possibly use the assets to fund a special (or supplemental) needs trust.

A SNT is like other trusts, but with unique provisions.  Like other trusts, a trustee is named to manage funds on behalf of the beneficiary.  But, in a SNT the trustee is required to consider the effect any distribution would have on the individual’s entire need.  If giving the child money for rent would affect eligibility for Medicaid or SSI, the trustee has to consider that and protect the beneficiary.

A SNT is a great way to protect a child with disabilities, or a troubled adult heir who can’t manage finances on his own.  But, this approach requires careful planning.  See a qualified attorney for help! We regularly help our clients protect heirs, spouse, and others during their lifetimes and as part of a comprehensive distribution of wealth through their estate plans.

B. IRA designations should be easy…  I just list beneficiaries for the IRA, right?

Well, not really!  IRAs require an entire course to understand their unique issues.  But, here are a couple of important points… IRAs are often qualified investments, meaning that taxes are not yet paid (they are “tax deferred”).  Taxes are due when the assets are taken out of the IRA.  The goal in a gift of the IRA should be to provide the eventual recipient the maximum flexibility in handling the divesting of assets and in paying the taxes.  Here are some key points:

  • IRAs should never be owned by a Trust.  Death of the IRA owner will probably cause a complete divesting of the holdings, along with loss of the tax benefits (meaning, you have to pay them right then).
  • You can make the trust a beneficiary if your servicer allows it and if you set up the Trust correctly.  But, great care is required, and the trust must have actual people as its beneficiaries. If you have more than one beneficiary, then consider separate trusts for each.
  • Don’t leave an IRA to a trust for a charity… there are other better ways to manage charitable giving.
  • Beneficiaries with special needs or troubled adult children or relatives should be protected by designating a special needs trust as a beneficiary.  And, of course, with a trustee who will act responsibly.
  • Minor children should be the primary beneficiaries, with a trust as secondary.  Look back at the information about minors if necessary.
  • Pass along IRAs to your spouse as a “spousal rollover.”

Failure to handle IRAs correctly will cause problems and could result in loss of all those tax benefits!​  Seek a qualified financial planner (you can look for certifications, such as CFP) or tax attorney for this complicated area.

Review Part 1 of this series – Beneficiary Designations

Look ahead to the next part, Part 3 – Estate planning coordination​.

ABLE Act and other IRA and tax extensions passed by Senate

​On December 16, the US Senate passed important new legislation which included a variety of important tax provisions.  Included is the “ABLE Act” which creates tax-favored accounts for children and adults whose disability occurred before age 26.  Some additional web sites to review this are NDSS and the ARC​ and ​​Autism Speaks.

The ABLE Act allows these tax-favored accounts to receive up to the annual gift tax exemption (currently $14,000 per year). Beneficiaries are restricted to one account, but anyone could contribute to their account. Modeled after 529 college savings accounts, ABLE account programs will need to be implemented by the states.

According to the Congressional Budget Office, “assets in an ABLE account and distributions from the account for qualified disability expenses would be disregarded when determining the qualified beneficiary’s eligibility for most federal means-tested benefits. For SSI [Supplemental Security Income], only the first $100,000 in each ABLE account would be disregarded.”

This provides important new options for parents with children with disabilities.  We will provide updates as needed for our clients.

The Senate passed the ABLE Act as part of the Tax Increase Prevention Act of 2014​, also known as “tax-extenders,” a bill that includes a variety of extensions for temporary tax provisions.

The IRA updates include a one year extension of expired tax provisions retroactive to January 1, 2014. This reauthorizes the IRA charitable rollover through December 31, 2014. Donors age 70 1/2 and older may transfer up to $100,000 from their IRA to a qualified public charity. The transfer will be made free of federal income tax and the gift qualifies for the donor’s 2014 required minimum distribution (RMD).

Because your window of opportunity is short for making IRA rollover gifts, we recommend that you contact your financial planner or tax adviser immediately. Keep in mind that it often takes IRA administrators several weeks to process rollover transactions. In order to complete the gift by year end, you need to act right away.

Getting divorced? Don’t forget to update your estate plans!

No one gets married expecting to get divorced … but it happens  to about half of all first marriages*.​  And, if divorcing, the marriage only lasts an average of about eight years.  ​Then, about 60% of divorced people remarry.  Well … that makes it possible for several people to have some degree of claim over each other’s estates and for a variety of different claims by children of each of these marriages.

What could happen?  Well, according to stories we have heard, just about anything!  Here is one extreme example … in 1980, Peter Sellers (actor, Pink Panther) died of a heart attack.  He was in the middle of divorcing his fourth wife (Lynne Frederick), but he had not quite gotten around to changing his will.  He allegedly wanted to leave his estate to his kids … but, he didn’t actually change the will.  The entire estate went to the almost divorced wife, and a mere token (nothing) to the kids.  The difference was something like $6 million.

Is there anything YOU want to change now?

We suggest that divorcing couples separately change a number of aspects of their estate plans (see below).  Ask your divorce attorney to suggest an estate planning attorney to help you do this.  Don’t leave it to an on-line system that can’t account for your real needs.  If you would prefer, just give us a call, and we will help you get peace of mind with this part of the pain of divorce.

Here is the list we suggest:

  • Change Last Will and Testament – don’t write on it!
  • Change or revoke recorded Financial Powers of Attorney that you might have given to each other
  • Change Health Care documents and HIPAA authorizations
  • Change beneficiary designations for life insurance and bank accounts
  • Change guardians of minor children, if named
  • Change trustees of trusts, including special needs trusts
  • Retitle assets if Trusts have been affected
  • Monitor business income for changes and revise payments or succession plans as necessary
Each situation is different, but we will help you through what you need.
* Information obtained in part from: Cohabitation, Marriage, Divorce, and Remarriage in the United States. Series Report 23, Number 22. 103pp. (PHS) 98-1998​

Considerations in planning for a child with special needs

Over 51.2 million Americans are living with a disability.  Many of these Americans are children, age 6 or older, who need personal assistance with their daily living.  Planning for a child with special needs can be complicated and often requires a team of concerned professionals.  A study by The Hartford shows that 62% of parents of children with special needs lack a basic plan to cover the future costs of child care once they are not around anymore.  If you have a child with special needs, there are a few areas that you should review to make sure that your child will have all of the tools and resources for a long and happy life.
The following is a short list of questions parents should ask themselves about long term planning for children with special needs:
  • Educational opportunities – Which programs are available in the community and/or region?
  • Cost of private services – Will the child  require a caretaker or some form of support?
  • Public benefits – How will the child qualify for SSDI, SSI, and Medicaid?
  • Guardianship – Will a guardianship be necessary if the child is over 18 and requires such assistance?
  • Health care options – Which medical professionals are familiar with the child’s needs and requirements?
  • Special needs trust – Should a special needs trust be created to help provide for a child without removing them from public benefits?
As always, the most important thing is to do everything you can to fulfill the wishes and desires of the child.  No one knows your child like you do, so anticip​​​​​​ate and prepare for the future now so that you can focus on raising a happy and healthy child.

​​​If you or a loved one face any of these challenges, you may need and should seek out the assistance of various public agencies, support groups, or attorneys knowledgeable about such matters.

Our office can work with your other team members to help with legal issues you may have, including the establishment of special needs trusts for the child.  Come talk with us and gain peace of mind in these difficult times.

—  Andrew Bullard Esq., Attorney​
Law Offices of Douglas E. Koenig, PLLC

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