ABLE Account Update
by Elizabeth Q. Boehmcke, Esq.
As we reported to you in our December 19, 2014 Newsletter, Congress passed and the President signed into law a new Act – Achieving a Better Life Experience Act or “ABLE Act”, designed to assist certain people with disabilities to save money in accounts that will not be treated as resources for the purpose of eligibility for means-tested government benefits, such as Medicaid and SSI. The ABLE account legislation is modeled on the legislation for the now-familiar 529 education savings accounts and would permit distributions for “qualified disability expenses” to be income tax free. Although the federal Act took effect in January, 2015, each state which wished to utilize ABLE accounts needed to pass its own enabling legislation before the program could be implemented within that state, and the Department of the Treasury was tasked with drafting regulations to implement the legislation. The Commonwealth of Virginia passed its enabling legislation early in 2015 and designated the Virginia College Savings Plan to administer the ABLE accounts for Virginia residents. However, Virginia529’s website states that it does not expect to have the program ready for use before the first quarter of 2016 because it is waiting on regulations to be published by the Internal Revenue Service. The IRS published its Proposed Regulations for the ABLE accounts in June, 2015. These Proposed Regulations, although not final, provide some guidance on how these accounts will likely be funded and administered and how the IRS proposes to tax income on the accounts and the distributions from the account.
- Who is eligible to be a beneficiary of an ABLE account?
- Blind or disabled individuals, provided that such blindness or disability occurred before the individual’s 26th birthday, who are: 1) entitled to benefits under the Social Security Act OR 2) the subject of a “disability certificate” filed with the Virginia College Savings Plan. A “disability certificate” is one that is signed by a physician and which states that the individual has a medically determinable physical or mental impairment which results in marked or severe functional limitations and which can be expected to result in death or has or can be expected to last for a continuous period of not less than 12 months or is blind and that such condition occurred before 26th birthday.
- Who can create an ABLE account?
- An eligible individual or his/her agent under a power of attorney or, if none, his/her parent or legal guardian.
- Who can contribute to an ABLE account?
- Anyone BUT the total of ALL contributions in any given year is limited to the annual gift tax exclusion amount (currently $14,000).
- What is the maximum amount that an ABLE account can hold?
- This will vary from state to state but in Virginia, the current limit on such accounts is $350,000. However, it is important to note that to the extent that the ABLE account is in excess of $100,000, the balance is NOT disregarded for determining eligibility for SSI. However, the entire balance would still be disregarded for Medicaid eligibility purposes under current law.
- How is the beneficiary of an ABLE account taxed?
- The income earned by the ABLE account is federal and state income-tax free to the beneficiary of the account . Distributions for “qualified disability expenses” are excluded from the beneficiary’s income. However, if distributions are in excess of qualified disability expenses, a portion of the earnings on the ABLE account will be includible in the gross income of the beneficiary PLUS an additional tax equal to 10% of the amount includible in gross income is imposed.
- What are qualified disability expenses?
- Qualified disability expenses are to be broadly interpreted to include basic living expenses and should not be limited to expenses for which there is a medical necessity. They are to related to the beneficiary’s disability and are for the benefit of the beneficiary in maintaining or improving his health, independence, or quality of life. It Includes but is not limited to education, housing, transportation, employment training and support, assistive technology, health, financial management, legal fees, funeral and burial expenses etc.
- Can the assets held by the ABLE account be invested?
- Yes, but the investment directions cannot be changed more than twice per year.
- What happens if the beneficiary moves to another state?
- The Proposed Regulations allow the beneficiary to maintain his or her account in the state where the account was initially established or to “rollover” the account to the beneficiary’s new state of residence. This flexibility will be advantageous to the beneficiary who moves to a state in which the maximum amount that may be held in an ABLE account is higher or lower than the original state.
- What happens when the beneficiary dies?
- First, Medicaid has a right of recovery against the assets remaining in the ABLE account at the beneficiary’s death for Medicaid expenses paid after the establishment of the account. Additionally, the entire balance remaining at death is includible in the beneficiary’s gross estate for estate tax purposes. This may be of more importance to beneficiaries who reside in states which still impose a state estate tax (Virginia does not) because the current federal estate and gift tax exemption amount is $5.43 million.
- How can I use an ABLE account as part of my planning for an eligible disabled individual?
- ABLE accounts are perfect for unexpected, small inheritances or modest gifts that might otherwise jeopardize means-tested benefits. ABLE accounts can also be a way for disabled individual who does not spend all of his or her income (from SSI or a job) to save modest amounts of money and not jeopardize benefits. They are the perfect tool to preserve a beneficiary’s eligibility in the event of a small and unexpected overage in resources. However, an ABLE account is not a substitute for a Third Party Special Needs Trust. Because the total amount of all contributions to the ABLE account (whether from the beneficiary himself or from friends and family) cannot exceed the annual gift tax exclusion, the ABLE account is not a vehicle for large inheritances, personal injury settlements, or life insurance proceeds. In addition, in stark contrast to the Third Party Special Needs Trust, the ABLE account has a Medicaid payback provision that will reduce the amount available to be paid to other beneficiaries on the death of the beneficiary.
- When will I be able to establish an ABLE account in Virginia?
- We expect the first accounts to be established sometime in early 2016. We anticipate that additional guidance and information will be forthcoming from the Virginia College Savings Plan before the end of the year and we will pass it on as soon as possible. However, eligible individuals and their loved ones may want to anticipate the opening of the ABLE account plans and begin to acquire the documentation suggested by the Proposed Regulations so that the accounts can be opened as soon as possible. In as much as one of the main uses of the ABLE account may be to act as an emergency receptacle for excess resources, having the account opened and ready to accept deposits will avoid unnecessary account opening delays in the event of a crisis. For those intrigued by the tax-free growth potential of the accounts, waiting until the end of the calendar year to make larger deposits into the account would make more sense because the donor could make deposits of the balance of the gift tax exclusion amount remaining for the year after taking account of all other deposits into the account.
Please contact one of our experienced attorneys to discuss your special needs concerns, including the new ABLE accounts.
Ask Kit Kat – Lucky Lucas
Hook Law Center: Kit Kat, what can you tell us about Lucas, the cat who was a burn victim in New York City?
Kit Kat: Well, Lucas was indeed one lucky kitty. In June of 2014, he was found near 155th Street on the D subway line. Somehow he had encountered one of the electrified rail tracks, and his ears were severely burned, one almost completely destroyed. Thankfully, a transit worker came to the rescue before it was too late. He was taken to an ASPCA Animal Hospital, where his wounds were treated. Several surgeries ensued. Eventually, one of the workers at the hospital took him to her home as a foster cat.
The foster worker, Rena, was to be commended. She and her family already had a Beagle, a Chihuahua, and 3 cats. Lucas made the 4th cat, but he soon fit right in, and became the informal leader of the felines. It wasn’t long before the family decided Lucas should become a permanent addition. Rena says, ‘Fostering special-needs animals made me realize that everyone deserves a second chance. They really turn around when they’re in a home environment.’ So one can see why Lucas is called “Lucky Lucas.” Fortune smiled upon him, and he is living a great life. The scars of the past do not seem to have adversely affected him. He is playful and lovable. Would that more abandoned cats could find the same happiness.
(ASPCA Action, “Lucky Lucas: Feline Burn Victim Gets Second Chance with ASPCA Staffer,” Spring/Summer 2015, p. 11)
- August 22, 2015 – Hook Law Center is sponsoring “Shred with a Purpose” to be held at our Virginia Beach office, 295 Bendix Road, from 9am until 12Noon. Donations to the Alzheimer’s Association for the “Walk to End Alzheimer’s” will also be accepted. For more information, please call 757-399-7506 or click the following link to view the event flyer: Shred With A Purpose Flyer.
- August 25 & 26, 2015 – Hook Law Center Seminar Series: “My Father Has Been Diagnosed With Alzheimer’s…Now What?,” 8/25 @ 10am at Hilton Garden Inn, Harbour View in Suffolk and 8/26 @ 10am at Crowne Plaza Hotel in Virginia Beach. Please visit www.hooklawcenter.com/seminars to register.
- August 27, 2015 – Andrew H. Hook will be speaking to a group at Mary Immaculate Hospital in Newport News, Virginia.
- September 9, 2015 – Andrew H. Hook will be speaking at a Virginia Continuing Legal Education seminar.
- October 9, 2015 – Andrew H. Hook will be part of a panel discussion at the 2015 Art of Healthy Aging Forum & Expo on Friday, October 9, 2015, at the Virginia Beach Convention Center, 100 19th Street, Virginia Beach, VA 23451. The forum & expo runs from 9 a.m. – 2 p.m. Tickets are $15 until September 30th (limited seating). $25 at the door. To register for this event, please click registration.
- October 26, 2015 – Shannon Laymon-Pecoraro will be speaking at the National Business Institute’s seminar on The Probate Process from Start to Finish in Virginia Beach, Virginia.
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