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Wills and Estates Blog

The End of the 12 Year Maryland Estate Tax Experiment

Thursday, September 22, 2016

The Maryland legislative session of 2014 began with a bang. Specifically, the House introduced HB 739 that presumably could cause major changes to the way you and I plan for the inevitable. Yesterday, the Maryland Senate approved Maryland State HouseHB 739 that will recouple the Maryland estate tax exclusion with that of the federal government.

For over a decade, Maryland has taken the position that it would operate separate from the federal system regarding the taxation of estates. When the federal government began making changes to the federal estate tax system in the early 2000’s, Maryland froze the estate tax exclusion at $1,000,000 per estate and capped the tax rate on any amount in excess of the exclusion at 16% and completely decoupled itself from the federal system.

Meanwhile, the federal estate tax exclusion has grown to over $5,000,000 and the concept of portability for married individuals was created. However, Maryland stood strong and chose to remain decoupled.

After a dramatic 12 year experiment, Maryland has decided to recouple itself to the federal system. With a vote of 119 to 14, HB739 passed in the House on March 7, 2014 and the bill passed in the Senate with a 36 to 10 vote on March 20, 2014. All that remains before this bill becomes law is Governor O’Malley’s signature of approval. Specifically, HB 739 proposes to gradually increase the estate tax exclusion, which currently sits at $1,000,000 per estate, to the federal level at $5,000,000 per estate.

Current Law
In 2002, the federal government began making substantial changes to the federal estate tax system. To avoid eliminating state estate tax revenue, Maryland enacted several pieces of legislation between 2002 and 2006, which froze the state estate tax exclusion at $1,000,000 and capped the tax rate on any amount in excess of the exclusion at 16%.

While the concept of portability has been presented on multiple occasions, the Maryland legislature has yet to approve the device.

As the law currently stands, if you or a loved one passes away this year, your estate will be able to exclude $1,000,000 of your taxable estate from estate tax. Any excess above and beyond the exclusion will be taxed at a rate of 16% and your estate will need to file a return and pay the outstanding tax liability.

HB 739 Changes
Upon enactment of the bill, the Maryland estate tax exclusion will gradually increase as follows:

  • If you (or a loved one) passes away in 2014, the estate will be able to exclude $1,000,000.
  • If you pass away in 2015, your estate will be able to exclude $1,500,000;
  • If you pass away in 2016, your estate will be able to exclude $2,000,000;
  • If you pass away in 2017, your estate will be able to exclude $3,000,000; AND
  • If you pass away in 2018, your estate could exclude up to $4,000,000.

The proposed bill does not change the cap of 16% on the excess over the exclusion amount. Therefore, any excess above and beyond the exclusion amount for a given year will continue to be taxed at a rate of 16%.

More Changes to Come?
Portability is a term used in the federal estate tax realm, where the estate of a married individual would pass any unused estate tax exclusion amount to the surviving spouse’s estate upon his/her death. The surviving spouse may exclude the sum of any unused exclusion from the deceased spouse’s estate and her own estate exclusion amount.

Currently, Maryland estate tax does not allow for portability of unused estate tax exclusion that may remain after a married individual dies. Early this month, the House introduced HB 1214 which proposes to establish portability as a mechanism that may be used for married individuals that do not exhaust their individual estate tax exclusion. By allowing “portability” the surviving spouse whose estate increased as a result of deceased spouse’s death would then be able to include the unused exclusion of the deceased’s estate with surviving spouse’s estate tax exclusion amount. In essence, if you die in 2014 and your estate tax exclusion only amounted to $500,000, then your surviving spouse would be able to claim your unused portion estate tax exclusion. Thus, your surviving spouse’s estate tax exclusion would increase to $1,500,000[1].

What does this mean to you?
With recoupling to the federal system in sight, the stresses of planning for the inevitable may have been relieved ever so slightly. By recoupling with the federal system, you as an individual can plan with ease, as your estate plan will accounts for both the Maryland and federal systems without requiring creative planning to address each system separately. Unless your estate exceeds $5,000,000 and potentially $10,000,000 if you are married, creative planning for estate tax purposes may no longer be necessary.

[1] Your unused exclusion amount ($500,000) + Surviving Spouse’s exclusion amount ($1,000,000) = Surviving Spouse’s Total Exclusion ($1,500,000).


Maryland Same Sex Estate Planning in 2013 and Beyond

Thursday, September 22, 2016

Estate planning in Maryland for same sex couples is dramatically different as a result of two groundbreaking legal developments in 2013. On January 1 same sex marriage became legal in Maryland and on June 26 the Supreme Court struck down portions of the Defense of Marriage Act (DOMA). As a result, same sex married couples in Maryland have all the state and federal benefits afforded to their heterosexual counterparts. I underlined “married” to remind you that these benefits require a marriage (i.e., don’t dilly dally). Here are the five most important things to understand going forward:

No more inheritance tax surprises.

Prior to 2013, the surviving member of a same sex couple was not exempt from inheritance tax. This lead to some nasty surprises such as getting an inheritance tax bill for half of the value of the jointly owned house after the first member of the same sex couple died. (See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home). Now, so long as the same sex couple takes the steps necessary to become legally married, they are exempt from inheritance tax.

2. Enhanced Legal Protection for those Without a Will.

The law in Maryland provides certain protection to spouses when there is no Will. To begin with, a spouse has the highest priority to become the personal representative (i.e., executor). The spouse is also entitled to an intestacy share of the estate, usually one-half, in the absence of a Will. Prior to 2013, unless a same sex couple had a Will, the surviving member of the couple would not be given any priority to become personal representative and would be entitled to no share of the estate.

3. Protection from disinheritance.

Maryland law also contains provisions designed to prevent the disinheritance of a spouse. Regardless of what the Will provides, a spouse can “elect against the Will” and take a statutorily provided share – one third. Now same sex married couples also have that same protection against being disinherited.

4. Unlimited Marital Deduction from Estate Taxes.

In both the Maryland and Federal estate tax schemes, there is no limit to the amount a spouse can give to their surviving spouse without paying estate taxes. As a result of both Maryland’s enacting of same sex marriage and the defeat of DOMA, same sex married couples now enjoy the same privilege.

5. Estate Taxes Are Still a Potential Problem.

Just as with heterosexual married couples, same sex married couples need to understand that there is still a potential estate tax problem. While there is an unlimited marital deduction, there are still potential estate taxes due upon the death of the second spouse. The second-to-die still can only give away $1 million dollars in Maryland tax free (federally the number is $5.25 million). Thus for same sex couples whose taxable estate may be more than a million at the death of the second spouse, estate tax planning should be considered. (See No. 5 in The 5 Most Important Reasons to Have a Will). Don’t think you have enough assets to worry about this? Remember, the taxable estate includes anything that passes as a result of a death. Thus, assets like IRAs, 401ks and life insurance policies, which do not have to go through probate, are still a part of your taxable estate.


Death of a Loved One: Practical and Legal Guidance

Thursday, September 22, 2016

Dealing with the death of a loved one both before and after death are the two most difficult situations in our lives. In addition to the emotional toll, there are also innumerable details, practical and legal, surrounding a loved one's death. Most people are not aware of the steps that need to be taken in preparation or after death. And even if they are aware, most people have a difficult time focusing on these tasks in such a fragile emotional state. In an attempt to help during this difficult time I wrote a manual of sorts. Death of a Loved One contains checklists to assist both before and after death. You can download a free copy of the booklet here.


How Does the New Fiscal Cliff Legislation Affect my Estate Tax Planning?

Thursday, September 22, 2016

On January 2, 2013 the American Taxpayer Relief Act of 2012 was enacted, avoiding the so-called “fiscal cliff.” In addition to income tax changes, the law contained provisions on estate taxes which certainly did avoid something very cliff-like. Had the law not been enacted, the federal estate tax exemption would have reverted to $1 million per person. The “exemption” is the amount that passes free of estate tax. Under the last change to the estate tax law in 2010, the exemption had been at $5 million (See 5 Important Facts About the New Estate Tax). Avoiding this significant (i.e., cliff-like) change in the estate tax exemption was an important feature of the new act.

The new law preserves the federal estate tax scheme which has been in place for the past two years into the foreseeable future. Each person continues to have approximately $5 million that can be given away free of estate taxes. The only real change in the new law is that the highest estate tax bracket increased from 35% to 40%. Assuming your estate planning was appropriate last year, there should be no need to change it as a result of the new legislation.

Portability

The new law also continues the portability provisions which have been in place since 2010. (See 5 Important Facts About the New Estate Tax). These provisions allow the surviving spouse to be able to use their deceased’s spouse unused $5 million exemption. Thus, a married couple’s total exemption exceeds $10 million when indexed for inflation. The portability provisions make the use of credit shelter or bypass trusts unnecessary for federal estate tax purposes. Prior to portability, these types of trusts were the only technique to preserve the deceased’s spouse tax exemption.

State Estate Taxes

Unfortunately I have some bad news for my local readers in Maryland and the District of Columbia. Maryland and the District still have separate estate taxes which have only a $1 million exemption. Thus, if you have a taxable estate (including life insurance) in excess of $1 million, state estate taxes are still a concern even if they are not federally. Moreover, the portability provisions are still only federal law. As a result, credit shelter or bypass trusts still may be needed in Maryland and the District if married couples want to be able to use both of their exemptions. (See The 5 Most Important Reasons to Have a Will).


What is so “Special” about a Special Needs Trust?

Thursday, September 22, 2016

The Problem. You have a disabled child who is currently receiving need-based public assistance such as Supplemental Security Income (SSI) and Medicaid. Your child is receiving those benefits because he or she is disabled and because he or she does not have sufficient income and resources. As a parent, you want to make sure that your child is provided for after your death. This is especially true in the case of a disabled child. Your plan to provide for your disabled child probably includes a life insurance policy in addition to assets you have accumulated over your life time. But what happens to your child’s eligibility for SSI and Medicaid if they suddenly receive a significant amount of money in the form of inheritance and life insurance proceeds. The answer is that your child will lose the monthly SSI check and, more importantly, health insurance coverage through Medicaid. Is there a way to provide for your disabled child after your death without endangering their public disability benefits?

The Solution. The Special Needs Trust (SNT) is the answer. If your Will and beneficiary designations direct the assets into a properly drafted SNT, your disabled child will continue to receive their SSI and Medicaid coverage.

To understand how this works, first we need to discuss trusts in general. A trust is just an agreement between a grantor (the one with the money or property) and a trustee in which the trustee agrees to accept and hold money (or other property) for the benefit of someone else. Commonly parents, instead of giving assets to a minor, will give assets to a trustee who will hold the property or money for the minor until the minor reaches an appropriate age. Until the child reaches that age, the trustee will be tasked with using the money for the minor’s benefit. (See Avoid Naming Your Minor Children As Beneficiaries)

A SNT is a special type of trust created by statute. 42 U.S.C. §1396p(d)(4). If the requirements of the statute are followed, any money (or other property) put into the SNT will not be considered an available resource to a disabled beneficiary. Thus, the trust property will not cause the disabled beneficiary to lose their SSI and Medicaid.

Key Features of a Special Needs Trust

1. Beneficiary has no right to demand assets

The disabled beneficiary can have no right to demand any income or principal from the trust. This is the key feature. If the disabled beneficiary could demand payment, then the money in the trust would be available to the disabled beneficiary and thus the entire amount of the trust would be used to disqualify the person for SSI and Medicaid.

Thus in a SNT, the trustee must have complete discretion to use the money as they see fit. The disabled beneficiary can ask for whatever they want but the trustee has the ultimate authority whether not to expend the trust income or principal.

2. Trust funds cannot be used for basic necessities

The second key feature of a SNT is that the trustee cannot use the trust assets to pay for services being provided for by public assistance. The monthly SSI check is for the basic necessities of clothing, food and shelter. Thus the trust cannot be used for clothing, food or shelter. Then what can we do with the trust? The answer is everything else. The trust could be used to pay for a car, a computer, a vacation, etc. Think of the trust as a tool to enhance the quality of the disabled beneficiary’s life. It is not a mechanism to pay for their basic needs which are, theoretically, being taken care of by SSI and Medicaid.

Different Types of Special Needs Trusts

1. Self settled

A self settled SNT is one in which the disabled person’s own money (or money to which the disabled person is entitled) is being used to fund the trust. Examples of self settled SNTs are where the trust is funded with:

a recovery in a personal injury lawsuit,
a settlement of a workers’ compensation claim, or
an inheritance.

In each of these examples, the disabled person is entitled to the funds being used to create the trust.

There are two disadvantages to this type of SNT. First, it typically will require approval. In Maryland, the trust has to be approved by the State Attorney General and, most likely, a circuit court. This is expensive and time consuming. The second disadvantage occurs at the death of the disabled beneficiary. If the disabled beneficiary had used Medicaid at any point during their life, Medicaid will have to be paid back out of the remaining trust assets before any money can be distributed to heirs. This is referred to as a payback provision.

Unfortunately, the self settled SNT is the only real option for personal injury recoveries and workers’ compensation settlements. This is not the case with inheritances. If the parent (or any other person) plans ahead, they can create a third party SNT prior to death and avoid both the approval process and payback.

2. Third party

In contrast with a self settled trust, a third party trust is funded with money coming from somebody else – not the disabled person. The most common third party SNT is when a parent creates a SNT for their disabled child. They money is the parent’s money, not the child’s money. The third party SNT is preferred over a self settled SNT for two reasons. First, approval is not required. So, for instance, a parent could draft a SNT into their Will and it never has to be approved by anyone. Second, there is no payback required. The terms of the SNT will determine who gets the remaining trust assets at the disabled beneficiary’s death.

3. Pooled

In a pooled SNT, a non profit organization (NPO) has already drafted a SNT and had it approved by the appropriate state officials. Disabled persons can then join the SNT. The NPO keeps a separate account for each beneficiary but pools the money together for investment purposes. The NPO serves as the trustee. The pooled SNT has some distinct advantages. First, there is no need to get the trust approved. This can save significant time and expense. Second, the NPO handles all of the investment and generally earns a better rate of return because the assets are pooled. Third, the NPO’s trustees are well versed in SNT law and understand what types of expenses can and cannot be paid to ensure that the disabled person remains on SSI and Medicaid.

In conclusion, any parent of a disabled child should seriously consider creating an SNT to protect your child’s right to future public assistance. Once the SNT is established you would then just make sure that all assets go to the SNT at your death instead of to your disabled child directly. So in your Will, you need to direct your assets to the SNT, not the disabled child. For all the non probate assets (life insurance, 401ks, etc), you need to remove your disabled child as the beneficiary and instead designate the SNT.


5 Things to Understand About Maryland’s Inheritance Tax

Thursday, September 22, 2016

1. It’s All About Who Inherits

Maryland has both an estate tax and inheritance tax. The estate tax is assessable if more than one million dollars passes at death. The total dollar value of the property determines whether there is an estate tax. The inheritance tax is not dependent upon the value of the estate, as even very small estates can have inheritance tax imposed. Inheritance tax is assessed on property given to a person who is further removed in relationship than a sibling. Thus, for example, a 10% tax will be assessed on property passing to a cousin, niece, nephew or friend.

2. It Applies to Non-Probate Property

Inheritance taxes, like estate taxes, are assessed on all property passing as a result of the death, not just the probate property. Thus, non-probate assets, such as life insurance and IRAs, which pass directly to the beneficiary, are still subject to inheritance tax if the person receiving the property is further removed in relationship than a brother or sister.

3. Think Carefully About Nieces & Nephews

If you are considering including your niece or nephew in your Will (or as a beneficiary on a non-probate asset) remember that they will be subject to the inheritance tax. It is worth considering whether the property should be given to your brother or sister with the hope that the property will be used for the benefit of a niece or nephew. This option requires trust that the brother or sister will use the property for the niece or nephew as this cannot be specified in the Will.

4. Giving Away a Car or a House Can Cause Problems

Be careful about giving anything other than cash to someone who will be subject to an inheritance tax. If you give someone $10,000 in cash, the inheritance tax will simply reduce the amount inherited – in this case to $9,000. (10% comes off the top to pay the inheritance tax). But if you give them a car with a bluebook value of $20,000, they will need to come up with $2,000 to pay the inheritance tax. If they can’t afford the tax, they will have to sell the car. The same is true for houses. If you give a niece your $300,000 house she will need to come up with $30,000 to pay the inheritance taxes. Thus it is important to make sure that your intended beneficiary can pay the inheritance taxes due.

5. Same Sex Couples Beware

Same sex couples who jointly own their primary residence can be for a nasty surprise after the death of their partner. Same sex partners, if not legally married, are further removed in relationship than a brother or sister. In fact, they are not related at all. Thus the inheritance tax would apply to any property the surviving partner receives. Thus the surviving partner would be subject to 10% inheritance tax on half of the value of the house inherited as a result of their partner’s death. See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home for how to avoid this problem.


What Happens to My Kids if I Become Incapacitated?

Thursday, September 22, 2016

One of the overriding purposes driving people to create and establish an estate plan is to ensure their minor children are cared for and will continue to be provided for in case a tragedy befalls the family and one or both parents pass away.

Benefits of a Last Will and Testament

One of the great benefits of having a Last Will and Testament is the ability to appoint guardians for your minor children. However, your Will does not have any effect during your lifetime. It only becomes effective upon your death. What if the tragedy does not result in your death but merely incapacity or inability to provide for your minor children? (e.g., as a result of a car accident you are in a coma). Who is authorized to serve as guardian for your minor children and how can you ensure the right person is appointed? Several states including Maryland have developed a statutory mechanism that allows parents to plan for this very real tragedy and that mechanism is called a “standby guardian”.

The Future Care of Your Children

A standby guardianship allows parents to plan for the future care of children without terminating their own parental rights. A standby guardianship is similar to the nomination of a guardian for minor children under your Last Will and Testament, except that the standby guardianship may become effective during your lifetime. A parent may be diagnosed with a life threatening disease or an accident may change the parent’s situation drastically in an instant. By designating a standby guardian, parents ensure that their children are cared for by an individual(s) of their choosing. The standby guardianship allows the guardian(s) to take action in advance of petitioning the court for a court ordered appointment as guardian of the minor child.

How The Process Works

In order to designate a standby guardian, the parent must only execute a written designation that is (1) signed in the presence of two witnesses and (2) signed by the designated standby guardian. The designated standby guardian is appointed when a “triggering event” occurs. The triggering event may be the incapacity, death or written consent for the guardianship to commence. Once the triggering event occurs, the standby guardian’s authority begins. Thereafter, the standby guardian must petition the court to appoint the standby guardian as guardian of the minor child within 180 days. Parents can revoke the standby guardianship at any time prior to the filing of the petition by any means that demonstrates an intent to revoke the designation.

Best practices dictate that a parent with minor children should provide for guardianship of minor children through a will and also through a standby guardianship. While it is impossible to plan for every possible occurrence in an individual’s lifetime, planning for the care of your minor children can be simplified by including a standby guardianship in your estate plan. At Berman, Sobin, Gross, Feldman & Darby, LLP we include a standby guardianship as a part of our basic estate planning package for all clients with minor children.

 


Owning A Joint Checking Account With Your Child: A Road to Responsibility or A Road to Disaster?

Thursday, September 22, 2016

It is imperative that you weigh the pros and cons before opening a joint account with your child. Particularly, you must analyze your situation and your reasons for doing so. You will find that for many of these reasons there may be other options that do not change ownership but still carry out your goals and wishes.

Pros of Having a Joint Checking Account

1. Convenience

Your child can assist you with paying bills and looking out for your finances should you need assistance. In addition, for parents with a minor child, a joint account allows you to closely monitor your child’s spending and teach them how to manage finances.

2. Avoid probate

For many, the primary concern is having money that is readily available after death. Probate delays the ability to access your account immediately. However, the accounts could be made Transferable on Death or Paid on Death, which means that the account will automatically be transferred to the named beneficiary or paid to the named beneficiary. This is an attractive alternative for parents who have more than one child because the funds will be divided amongst all of your children without any legal delay of the probate administration process.

3. Build Trust

Having a joint account with your child can help build trust. It can give you both ease in knowing the other person is responsible with managing money.

Cons of Having a Joint Checking Account

1. Unfettered Access

As a joint owner, your child can withdraw your entire account balance at any time, for his own use, and he is not required to pay it back (at least without a court order). The only time you should ever open a joint account with someone is when you have absolute trust that they won’t take advantage of you. An irresponsible child could just wait until you make a big deposit and withdraw all of the money and close the account.

2. Account is Subject to Creditors

When you add your child to your bank account, the money in the account is considered an asset of you both. Thus, you are at risk of taking on your child’s personal liabilities. For instance, your child may have issues with a creditor and a judgment may be levied against him or your child files bankruptcy, now the joint account could be garnished or subject to scrutiny.

3. Gift Tax Issues

When a joint account is held with someone other than a spouse, there is a risk that you may be subject to gift tax. According to the IRS, you can give up to $14,000, per person, per year, to a person (other than your spouse) without having to file a gift tax return. Therefore, if you open a joint account with your child and your child withdraws money for his own benefit, you have made a gift to that child for the amount withdrawn that is subject to the filing of a gift tax return.

4. Spouse’s Access

If you and your child are injured and you are both left disabled but your child’s spouse has power of attorney, then your son-in-law or daughter-in-law now has access and control to the joint account. In addition, if your child is separated from his spouse, his spouse is now entitled to a portion of this jointly held bank account when their assets are divided up during the divorce.

5. Estate Implications

If your child is a joint owner of this account and it was your intention to leave the money in this account to all of your children equally when you pass away, your wish will not be followed. The title of the account triumphs your Last Will and Testament. If the account is held jointly with rights of survivorship, the funds in this account will pass directly to the surviving joint owner—your one child, not equally amongst all of your children.

6. Sibling Rivalry

If you have more than one child, the addition of one child as a joint owner on your bank account may cause the other child or children to feel slighted and elder financial abuse could be alleged.

For many of the pros of opening a joint account with your child, an alternative exists that far outweighs these pros. Your alternative could be to give your child Durable Power of Attorney. This gives them legal authority to act on your behalf. More importantly, the account remains with you and if your child abuses their authority, they can be held accountable.

 


Preparing for a Grand Exit

Thursday, September 22, 2016

Are you a small business owner? If so, you may love your job so much, that retirement, death, or incapacity are the furthest thoughts from your mind. While you may not intend to exit the business in the near future, have you considered the possibility of what might happen if you have to unexpectedly retire, die, or become incapacitated? How will your company continue to exist? Who will take the reins and run the company in your absence?

Depending on the level of your direct day-to-day involvement, determining who will take control of the business and/or training said individual could take quite a bit of time.

What exactly is a Business Succession Plan?

A business succession plan is a roadmap for your business in the event you retire, are incapacitated, or pass away. Think of a succession plan for your business like an extension of your personal estate plan. By creating a business succession plan, you are clearly identifying who will take over, how they transition into that role, and in what capacity. Depending on the nature and complexity of your business, a business succession plan can range from fairly simple and straight forward to quite complex and dynamic.

Similar to a personal estate plan, business succession plans are not “one size fits all.” To this end, it is highly recommended you speak with an attorney that is skilled in both business planning and estate planning to ensure that both plans work together to achieve your ultimate goals.

Why should every small business owner have a business succession plan?

A small business succession plan allows you to take a proactive approach to identify new owners of the business, address orderly transition from one owner to the next, identify procedures for transfers in ownership that are the result of unanticipated circumstances that result in challenges (i.e. death, illness or incapacity, or even partnership disagreements).

Business succession plans allow you to prepare for retirement while securing the survival of the business beyond your ownership. Further, by implementing a business succession plan you are able to address and account for various tax consequences associated with a transfer in ownership.

Consequences of not having a plan in place

Not having a plan leaves everything up to chance. Why would you ever want to leave something you have devoted a substantial amount of your life, both physically and emotionally, up to chance?

There is potential for monetary loss due to estate, gift, and income tax issues. Additionally, not having a plan could result in huge gaps in wealth from a lack of business valuation activities and financial planning.

Lastly, without a plan in place, your business may end with you slowing down or becoming incapacitated. Due to the structure of the business and the individuals involved, not having a plan could result in the business having to dissolve and liquidate.

If you are a small business owner it is imperative you establish a succession plan to ensure that your business and your family have a smooth transition in the event you retire, become incapacitated, or die.

To learn more about how a business succession plan can assist you in your time of need please Contact Us or call (301) 670-7030.

 


Are You Ready for ABLE?

Thursday, September 22, 2016

As you may have heard, Congress enacted the Candy Machine 100 Dollar Bills Achieving a Better Life Experience Act of 2014 (the “ABLE Act”) on December 19, 2014. Many have deemed this a monumental step toward the betterment of the lives of individuals faced with mental and/or physical disabilities. While many experts would agree this piece of legislation is several years too late, Congress’ decision to move this legislation forward is a huge victory for those families that must deal with physical and mental disabilities of their loved ones on a daily basis.

Overview of the ABLE Act

The purpose behind this Act is two-fold: (1) assist and provide families and individuals with disabilities certain private savings funds designed to support health, independence, and quality of life; and (2) provide secure funds that are designed to supplement, but not supplant, benefits provided through private insurance, Supplemental Security Income (SSI) and Medicaid, the beneficiary’s employment, and other sources of income.

People that have a disability tend to depend on a multitude of public benefits for assistance with health care, food, housing, education etc. To maintain eligibility for these public benefits, certain resource and income thresholds must be met. Generally, an individual cannot have cash savings, retirement funds, etc. in excess of $2,000. This maximum amount is very small when compared to the additional costs of living that are not covered by governmental programs.

Prior to the enactment of the ABLE Act, generally, the only means of assisting disabled individuals was through the use of Special Needs Trusts (Special Needs Trust). For many families, the complexities and costs associated with creating and administering a Special Needs Trust might seem to outweigh the benefit of using a Special Needs Trust. The ABLE Act provides a new tool to allow families to provide a better quality of life for their loved one.

An individual with a disability may now continue to qualify for public benefits while owning assets held in an ABLE account.

These funds held in an ABLE Account do not have any of the restrictions commonly placed on assets held in trusts (i.e. the funds cannot be used to pay for housing or food). Specifically, the ABLE Act allows any funds held in the account to be used for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.

An ABLE account is disregarded for eligibility determination purposes for means-tested federal programs. However, individuals receiving SSI will have their benefits reduced/suspended for distributions attributable to housing expenses. Also, if the account balance exceeds $100,000, the SSI payments will be suspended for the period in which the assets exceed the threshold. However, an account with assets in excess of $100,000 does not suspend or affect Medicaid eligibility of such person.

Requirements for Establishing an ABLE Account

To qualify for the ABLE Account program, the individual must have “significant disabilities” that began before the individual’s 26th birthday. If the person meets this age requirement and is already receiving government benefits (SSI and/or SSDI) he or she is automatically eligible to establish an ABLE Account. (Disability Evaluation) Even if the individual is not receiving SSI or SSDI, he or she may be able to qualify for an ABLE Account through a certification process if the SSI criteria regarding significant functional limitations are met.

The age requirement only applies to the onset date of the disability, so those individuals that are over 26 may still qualify for an ABLE Account so long as the onset date of the disability was prior to the individual’s 26th birthday.

When Can an ABLE Account be Established?

Even though Congress passed the ABLE Act, it will be several months before ABLE Accounts are fully functional. Congress has instructed the Department of the Treasury to create regulations specific to ABLE Accounts to make sure proper procedures and oversight is in place. Once these regulations are provided, the states will then have the ability to establish ABLE Accounts and ensure the accounts are in compliance with the governing regulations.

Limitations on the ABLE Accounts

By statute, ABLE Accounts are a type 529 Plan. The statutorily created 529 College Savings Plans (see http://www.collegesavingsmd.org/ for information on Maryland specific 529 Plans) are established by each state in accordance with federal mandates. Just like the traditional 529 Plans, states most likely will take a similar approach in establishing ABLE Accounts. We can expect that states will place limits on the maximum account balances and will place limits on annual contributions to the accounts. For instance, several states have set maximum 529 Plan account balances at around $300,000 per plan. The state also may limit the Annual contribution limit, generally this limit is set in accordance with the annual Gift Tax exemption (currently $14,000). Thus an individual could make a maximum contribution to the 529 Plan of $14,000. Any contribution over the $14,000 limit may disqualify the 529 Plan and create potential negative tax consequences.

Specific to ABLE Accounts, this “new” 529 Plan will also include limits discussed in the overview section to maintain the account as a disregarded asset.

Unfortunately, any funds remaining in an ABLE account after the beneficiary dies must first be paid back to Medicaid for all services provided during the individual’s lifetime prior to distribution of the funds to others. After Medicaid expenses are satisfied, any remaining funds would then be distributed by the individual's established beneficiary designations, Last Will and Testament, or intestacy law.

Final Thoughts

While traditional models for planning and providing for disabled individuals (i.e. Special Needs Trusts) will remain a key fixture for many families, the ABLE Act has provided a unique mechanism that can supplement and fill-in the gaps where families are concerned with the costs and expenses associated with those traditional planning alternatives.

 


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