Worcester & Middlesex County Estate Planning & Elder Law

New Regulations Coming on 529 and ABLE Accounts

The regulations will reflect tax law changes affecting 529 plans as they relate to tuition refunds, K-12 education, and rollovers to an ABLE account for disability-related expenses.

The Internal Revenue Service (IRS) and Treasury Department recently announced that they plan to issue regulations on tax law changes that will impact 529 plans related to tuition refunds, K-12 education and rollovers to an ABLE account for disability-related expenses.

Think Advisor’s article, "IRS, Treasury to Issue 529 Plan Regs," explains that Notice 2018-58 talks about a change included in the 2015 Protecting Americans From Tax Hikes (PATH) Act, and two changes included in the 2017 tax overhaul.

Taxpayers, beneficiaries, and administrators of 529 and Achieving a Better Life Experience (ABLE) programs can rely on the rules detailed in the Notice, until the U.S. Treasury Department and IRS issue regulations that clarify the three changes.

The new regulations will simplify the tax treatment of a special rule added under the PATH Act for a beneficiary of a 529 plan. This is typically a student who gets a refund of tuition or other qualified education expenses. It can happen when a student drops a class mid-semester, according to the IRS and the Treasury. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free.

The Treasury Department and IRS regulation will stipulate that re-contributions wouldn’t count against the plan’s contribution limit.

The 2017 tax law allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year. These can be for an elementary or secondary (K-12) public, private, or religious school of the beneficiary’s choosing.

Another change in that law lets funds be rolled over from a designated beneficiary’s 529 plan to an ABLE account. That type of account is created to pay for disability-related expenses for those who become disabled before age 26 for the same beneficiary or a family member. The new IRS and Treasury regulations would say that rollovers from 529 plans, along with any contributions made to the designated beneficiary’s ABLE account—other than specific permitted contributions of the designated beneficiary’s compensation—can’t exceed the annual ABLE contribution limit. That limit is $15,000 for 2018.

Reference: Think Advisor (July 30, 2018) "IRS, Treasury to Issue 529 Plan Regs"

Need help sorting it all out? Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.

Financial and Estate Planning When Family Members Have Special Needs

Since most federal and state benefits are "needs based," the government is always looking over the shoulder of persons with special needs.

About 58 million people nationwide over the age of 5 identify themselves as disabled. That’s the largest single minority in the country. Millions of Americans want to help them.

However, as CBS News says in its recent article, "Special needs’ people need special financial planning," giving money directly to a child or adult who has special needs—especially if they're already receiving government benefits—can create problems.

If a person with special needs has more than $2,000 in their own name, he or she risks the loss of the government benefits that he or she already receives. It’s a major headache to get them back. Instead of giving a lump sum of cash to a person with special needs, the money should be structured in a way that doesn't violate government benefit requirements.

This is important because children with disabilities, like Down syndrome, now have a much longer life expectancy. As a result, the dependent person will probably outlive the parents. However, they will still require care throughout their life. Many adults with special needs live independently or in homes with little assistance. However, this doesn't mean that their government program benefits can cover their everyday needs. Therefore, it’s crucial to plan ahead.

There are several ways to have your money benefit people with special needs throughout their lives, without the loss of their federal benefits. One way is to create a special needs trust. This is a trust with the explicit purpose to "supplement, not supplant" federal and state assistance programs and to create a better quality of life for this person. A special needs trust can provide for special medical equipment, eyeglasses, and vacations, for example.

Work with an experienced estate planning attorney to create a special needs trust, because there are  many rules and regulations involved. For example, the beneficiary (the individual with special needs) can't own the trust—there must be a designated trustee or "third-party provider" who dispenses the money.

Another important part of an estate plan for the future of a dependent with special needs, is a "letter of intent." These are instructions that state what the guardian wants to happen in the future. It sets out everything a person with special needs requires, their history, and what you and the person want in the future.

Another alternative is an ABLE (Achieving Better Life Experience) account. This allows contributions to a maximum of $15,000 annually, provided the person is diagnosed as disabled prior to age 26. There is a maximum of $100,000 that can be in this account, before the person with disabilities loses his or her government benefits. An ABLE account can be used for expenses like education, employment training, health, legal fees, and funeral expenses.

Avoid these common mistakes that parents and caregivers make when planning:

• Disinheriting the child with special needs. Government benefits help provide food, shelter, and medical care, but remember, it’s no more than bare-bones necessities.
• Placing assets in your child's name. To qualify for government benefits like SSI or Medicaid, a person can’t have more than $2,000 in assets. If you leave funds or convertible assets directly to your child with special needs, they’ll need to be "spent down" to qualify for benefits.
• Relying on your other children to take care of their sibling with special needs. This is a lot to ask of a brother or a sister, and it can cause resentment.
• Leaving money to your other children to support their sibling with special needs. This isn’t a good idea, because the funds could be lost if the caregiving sibling dies, gets divorced, is sued, goes bankrupt, or just spends the funds. There's also no accountability.
• A 529 College Savings Plan or savings bond in your dependent's name. Like other assets, if these are more than $2,000, your child with special needs could be ineligible for government benefits.

Reference: CBS News (December 25, 2017) "Special needs’ people need special financial planning"

Need help making sure your family member with special needs is taken care of? Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.

Tax Break Reminders for the Disabled

Whether they're working or not, people with disabilities and their caregivers often have higher costs associated with medical care or daily living, so the current tax code makes some of these costs deductible.

The Centers for Disease Control and Prevention found in 2015 that 53 million adults in the U.S. (about 20 percent) live with a disability. As tax day approaches, Yahoo Finance offers some tax strategies for people with disabilities and their caregivers to consider in its article "8 Tax Tips for People With Disabilities (and Their Caregivers)."

ABLE accounts. These accounts are newer savings vehicles for those who become blind or disabled before the age of 26. The accounts are like 529 college savings accounts—the account grows tax-free and can be spent on eligible expenses with no taxes. Contributions to these accounts don’t qualify for a federal tax credit or deduction.  However, Iowa, Michigan, and Nebraska offer state tax benefits for contributing.

Take a higher standard deduction. Many deductions or credits require that you itemize, but if you take the standard deduction, you may qualify for a higher one, if you or your spouse is blind. In the 2016 tax year, the standard deduction for single or married filing separately is $6,300. That amount increases to $7,850 if the filer is blind or over the age of 65 or $9,400 if the filer is both blind and over the age of 65.

Child and dependent care credit. If you pay for day care or other care for a dependent, while you work or are seeking employment for work, this credit can decrease your taxes by up to $3,000 per dependent or a maximum of $6,000 for all dependents. This credit can also be used to pay for adult day care for a spouse or other dependent, who is physically or mentally not able to care for themselves, but you must itemize to get this credit.

Disability credit. People who receive stable disability income and are retired on permanent and total disability or who are age 65 or older may qualify for the Credit for the Elderly or the Disabled on their own tax return, which is between $3,750 and $7,500. However, there are income limits based on the filing status and adjusted gross income.

Disabled person as a dependent. Typically, you can’t claim a child as a dependent after age 19, or 24 if the child is a student. But a child or other relative with  a disability can be claimed as a dependent at any age, if you provide at least half their support.

Deduct medical expenses. If you itemize, and your family's medical and dental expenses in a calendar year are more than 10 percent of your adjusted gross income (7.5 percent if you or your spouse is age 65 or older), you can deduct the excess amount. This isn’t just for those with special needs, but parents with children who have special needs have a lot of out-of-pocket expenses.

Adoption of a child with special needs. Families that adopt a child who is a U.S. resident or citizen and whose state welfare agency deems them to have special needs, will usually be eligible for the maximum adoption credit of $13,460 per child in the year the adoption is finalized. Income limits apply, but in adoptions involving a child with special needs, the adoptive parents can claim the maximum credit regardless of whether they had qualified expenses of $13,460.

Declare disability payments. These aren’t always taxable income, since it depends on the situation. Review what type of disability benefits are being received and see if they’re subject to taxes. As an example, the IRS says that Veteran Affairs disability benefits shouldn’t be included in gross income, but if you receive long-term disability benefits from a plan that was paid for by your employer, the IRS says those can be taxable. Children who get disability benefits can also create confusion when filing returns, since some parents whose children receive payments from Social Security Disability Insurance think they must report that income on their own tax return. This is not true. It is reported on the child's tax return if the child has a filing requirement, not the parent's return. If the child doesn’t get income from other sources, their benefits are probably not taxable.

Reference: Yahoo Finance (February 15, 2017) "8 Tax Tips for People With Disabilities (and Their Caregivers)"

Need help? Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.  

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ABLE Act a Big Break for the Disabled

The Achieving a Better Life Experience, or ABLE ACT, was passed by Congress in 2014 and lets individuals with disabilities establish special tax-advantage accounts to help them with specific expenses.

Family and friends can contribute up to $14,000 annually to the accounts, but these accounts don’t count against Supplemental Security Income or other program income limitations, reports The Las Vegas Review-Journal in "Nevadans with disabilities will save money under ABLE Act."

The program is available on the basis of disability or blindness under the SSI program or under the Social Security disability, retirement, and survivors program. In order to be eligible, the individual’s disability must have occurred before age 26.

The funds in an ABLE account can be used for education, housing, transportation, healthcare, assistive technology, assistance in getting and keeping work, and other approved expenses.

The Nevada ABLE Act program is administered by the State Treasurer, and the Nevada Aging and Disability Services Division will provide program education and outreach.

“We are very excited to bring this opportunity to Nevada families,” Nevada State Treasurer Dan Schwartz said in a statement.

The money deposited in these accounts will be invested, and the increased value of these assets will be exempt from the means-tested Medicaid or Supplemental Security Income programs.

Reference: Las Vegas Review-Journal (January 26, 2017) "Nevadans with disabilities will save money under ABLE act"

Need help with your estate? Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com. 

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Retirement Planning When You Have a Child with Special Needs

As the life expectancy of adults with disabilities increases, it’s increasingly complicating one issue for their aging parents: retirement planning.

Having a child with special needs adds complexity to retirement planning. Parents must pay attention to minute but critical details—like beneficiary designations for their workplace 401(k)—while trying to save as much as possible for their own retirement, and at the same time trying to ensure that their child will have care after they’re gone.

A recent MarketWatch article, "Parents of special needs children plan for two futures," says that you’re planning for two lifetimes. In 2030, there will be approximately 1.2 million adults age 60 and older in the U.S. with developmental disabilities. That’s about twice as many of the 642,000 who fit that profile in 2000, according to 2012 research by the University of Illinois at Chicago. Also, according to the National Down Syndrome Society, today people with Down syndrome have a life expectancy of 60, compared with just 25 in 1983.

It’s critical that parents make certain that any savings and investments won’t disqualify their child from means-tested government benefits, which can impact the parents’ ability to save for retirement. To avoid this, parents should ask an elder law or estate planning attorney to help them create a special needs trust. The assets held in the trust for the person with disabilities won’t affect his or her eligibility for government benefits.

But remember: Rather than naming a child with special needs as the direct beneficiary of any asset, parents with a special needs trust for their child should name the trust the beneficiary. Parents can use their 401(k) or IRA funds as needed during retirement and any remaining funds will flow to their beneficiary only on their death.

There’s also a 529 ABLE account, which can hold up to $100,000 in assets without jeopardizing the eligibility of an adult with special needs for means-tested government benefits. Families are able to contribute up to the maximum gift exclusion each year.

At some point, parents themselves will need care—in addition to their child. Diminished capacity in aging parents can mean a need for outside help, which can be very costly. Parents should consider getting long-term care insurance coverage at age 50. That’s when they’re still healthy enough to pass medical underwriting but may no longer have large expenses like a home mortgage or college tuitions for other children.

Although expensive, long-term care policyholders can realize certain tax breaks. The IRS stipulates that qualified long-term care insurance premiums are an expense that can be funded through health savings accounts up to certain limits. Plus, long-term care expenses themselves can be paid out of an HSA, provided they meet certain criteria. HSAs offer other tax advantages. The money isn’t taxed when deposited but appreciates on a tax-deferred basis, and it can be withdrawn tax-free to pay for qualifying medical expenses now or in retirement.

Reference: MarketWatch (July 7, 2016) "Parents of special needs children plan for two futures"

The best way to ensure your financial decisions will not negatively impact your child’s eligibility for means-tested benefits is to work with an experienced elder law attorney. Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.   

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A 529 Savings Plan for the Disabled?

“I’ve heard there’s a new kind of 529 plan that can be used for people with disabilities — specifically for their long-term care. Is that true?”

This isn’t exactly a 529 plan. However, it’s sort of like one. It’s a new kind of account that’s similar in some ways and is designed especially for those individuals with disabilities.

An NJ101.5 article, "Special accounts for the disabled," explains that President Obama signed the Achieving a Better Life Experience (ABLE) Act in 2014 as part of the Tax Increase Prevention Act of 2014. The law allows qualified individuals with disabilities to have tax-free savings accounts in which they can save up to $100,000 without jeopardizing eligibility for Supplemental Security Income (SSI) and other means-tested government programs like Medicaid. SSI benefits are suspended for individuals whose accounts are over $100,000, but their Medicaid benefits will continue.

The plan is modeled on 529 college savings plans, and interest earned on savings is free from income tax; however, contributions to the account will not be tax-deductible.

ABLE accounts are different from 529 plans in that the funds in these accounts can pay for education, healthcare, transportation, housing, and some other similar expenses. To qualify, an individual has to have a disability that happened prior to age 26. Also, each individual with disabilities may have only one ABLE account, and the annual contributions are capped at the federal annual gift tax exclusion. That’s $14,000 this year.

Any funds that remain in the account when the account beneficiary dies must first be used to repay Medicaid for expenses incurred on behalf of the beneficiary.

States can offer these types of plans to people with disabilities, but they first must adopt regulations before financial institutions can offer the plans. Right now, Ohio is the only state in the country that currently offers such a plan, but other states’ residents can open an Ohio STABLE account.

The ABLE Act gives those caring for special needs loved ones another tool. However, the establishment of first- and third-party special needs trusts should be considered when contributions exceed the amounts allowed under the Act or when third parties don’t want their assets to be subject to a Medicaid payback.

Reference: NJ101.5 (July 1, 2016) "Special accounts for the disabled"

A qualified elder law attorney can help guide you through your options. Give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.  

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ABLE Accounts Offer Savings Strategy for Kids with Special Needs

Leslie Sieleni found out her son had Down syndrome when he was 5 days old. Now 14, Sean Sieleni talks about driving a car, going to college, living on his own, and getting a job. His mom supports those dreams, but she worries. One thing that eases her mind is the prospect of Minnesota authorizing a new kind of savings plan that gets its first committee hearing soon in the state Senate.

These "ABLE" accounts—which stands for “Achieving a Better Life Experience”—allow parents to sock away money for blind or disabled children in the same kind of tax-advantaged 529 account they now can set up to pay for higher education for their college-bound kids. According to a recent article in the Pioneer Press, titled "Minnesota law would help parents of children with disabilities save for future," right now people with disabilities can lose eligibility for public benefits once they reach $2,000 in savings. With an ABLE account, contributions of up to $14,000 per year are allowed under current rules, and the account could grow to $100,000 before Social Security Supplemental Security Income would be suspended.

The original article points out that these contributions themselves are not tax-deductible. However, your earnings accumulate tax-deferred, and distributions are tax-exempt if they are used for approved purposes like housing, transportation, education, health care, support services, and training. To qualify for an ABLE account, a person must have a significant disability with an onset before age 26.

In the first bill signed into law this session, Minnesota lawmakers and Governor Mark Dayton included the federal ABLE act. This act was signed by President Obama last year and was added to the state tax code, but lawmakers have to pass a bill to set up ABLE accounts in Minnesota. A Senate bill to do that gets its first hearing this month.

Reference: Pioneer Press (February 12, 2015) "Minnesota law would help parents of children with disabilities save for future"

An ABLE account shouldn’t replace other long-term estate planning, and families need to also look into trusts as well because the ABLE account is capped. When you die, you can't just dump assets into an ABLE account. The ABLE accounts do permit parents to level out how they treat their disabled and nondisabled kids in terms of annual gifts for estate purposes.

To help plan for your children with disabilities, give us a call at (978) 342-1914 or visit us at www.dellamonaca.com.