Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.
For a number of years the law (Section 529) has contained a provision for qualified tuition programs. These are accounts established and maintained by a State or state agency or instrumentality. Contributions to the plans aren't deductible (some states allow a deduction), but withdrawals of principal and any income from the plans aren't taxable income if used for qualified higher education expenses. Qualified higher education expenses include tuition, books, fees, supplies, equipment, for a designated beneficiary. Qualified expenses include room and board for students enrolled at least half-time. If a distribution from a qualified tuition program exceeds the qualified higher education expenses of the beneficiary, the portion of the excess that is treated as earnings generally is subject to income tax and an additional 10-percent tax. Amounts in a plan may be rolled over without income tax liability to another qualified tuition program for the same beneficiary or for a member of the family of that beneficiary.
Unfortunately, until now there's been no similar program for disabled individuals to provide for their special needs. A specially designed trust, sometimes referred to as special needs trust or supplemental needs trust, may be used to provide financial assistance to a disabled person (the trust beneficiary) without disqualifying the beneficiary for certain government benefits, such as Medicaid. The trust may be established using the disabled person's own funds (a self-settled trust) or the funds of a third party who does not have a legal obligation to support the trust beneficiary (a third-party trust).
The assets of a carefully drafted third-party trust generally are not counted when determining the beneficiary's eligibility for Medicaid. Assets held in a self-settled trust, however, generally are counted when determining Medicaid eligibility. An exception is when the trust (1) contains assets of an individual who is disabled (section 1614(a)(3) of the Social Security Act), (2) is established for the benefit of the individual by a parent, grandparent, legal guardian, or a court, and (3) terms provide the State will be reimbursed upon the individual's death for the total amount of medical assistance paid on behalf of the individual under the State's Medicaid plan, up to the amount of the assets in the trust on the death of the individual.
A qualified disability trust is allowed a deduction for a personal exemption up to that of an unmarried individual ($4,000 for 2015). In addition, amounts distributed to a child who is a beneficiary of a qualified disability trust are treated as earned income for purposes of the "kiddie" tax and thus are not taxed at parents' tax rates.
Qualified ABLE Programs
The new law (Section 529A) provides for a new type of tax-favored savings program and related accounts known as qualified ABLE (Achieve a Better Living Experience) programs and ABLE accounts. A qualified ABLE program is one established and maintained by a State or State agency or instrumentality where contributions may be made to an account established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account. Generally, ABLE accounts are treated the same as accounts established in a qualified tuition program, including the tax treatment of amounts contributed to, accruing in, and distributed from. Earnings in the plan are not taxed (unless used for nonqualified purposes) and amounts in the plan are not counted for certain means-tested benefit programs.
Distributions from an ABLE account are excludable from the distributee's gross income to the extent that the total distribution does not exceed the qualified disability expenses of the beneficiary during the taxable year. If a distribution from an ABLE account exceeds the qualified disability expenses, the portion of the excess that is treated as earnings is subject to income tax and an additional 10-percent tax.
Amounts in ABLE accounts may be rolled over into another ABLE account of the same beneficiary or into an ABLE account of an individual with a disability who is a family member of the beneficiary. Like an IRA, only one transfer per 12-month period is allowed and the rollover must be completed by the 60th day. You can not direct the investment of any contributions more than 2 times in any calendar year.
Qualified disability expenses include (but are not limited to):
The IRS is likely to provide guidance with respect to additional allowable expenses.
An individual with a disability is an individual (regardless of age) who has a medically determinable physical or mental impairment which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or who is blind. In order to be qualified for an ABLE program, an individual must be receiving benefits under the SSI program under title XVI of the Social Security Act (or deemed to be receiving such benefits by the State Medicaid agency or whose benefits are suspended other than by reason of misconduct), receiving disability benefits under title II of the Social Security Act, or the individual must file a disability certification with the IRS for the taxpayer year. The certification must be signed by a licensed physician.
There's a limit of one ABLE account per qualified individual. The maximum contribution that can be made to an ABLE account is equal to the annual gift tax exclusion--$14,000 for 2015 (indexed for inflation). (Excess contributions are subject to a 6% excise tax.) If the account, including earnings, exceeds $100,000 the excess is considered a resource of the designated beneficiary for means-tested federal benefit programs. In addition, any distribution for housing expenses will not be disregarded for testing.
In the event the beneficiary dies or ceases to be disabled, all amounts remaining in the ABLE account, subject to any outstanding payments due for qualified disability expenses incurred by the beneficiary, all amounts remaining in the beneficiary's ABLE account not in excess of the amount equal to the total medical assistance paid for the individual after creation of the account under any State Medicaid plan must be distributed to the State upon filing of a claim by the State. Distribution of any excess funds is not subject to taxation.
While the new law provides an easy and inexpensive means of sheltering some assets (maximum $100,000) of a disabled individual's assets from federal means-tested benefit programs and provides a tax-favored savings account, for many families looking to provide benefits to a relative, the program may not go far enough. The annual contribution limit (currently $14,000) and the total limit of $100,000 is hardly generous. A special needs trust contains no such limitation. On the other hand, with a ABLE account there's no legal expenses of setting up a trust, nor annual trust tax return filings. Because of the dollar limits for contributions, any tax benefits from the nontaxable status of the account are likely to be small.
The biggest disadvantage, however, is likely to be the fact that any remaining amounts in the 529A account can be claimed by the state to the extent of Medicaid benefits received by the beneficiary.
On balance, ABLE accounts are unlikely to replace special needs trusts, but can represent an alternative for some families, particularly those who are unlikely to be able to put enough into a special needs trust to take advantage of the benefits.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 01/02/15