A new law was enacted at the end of 2014 allowing states to establish qualified Achieving Better Life Experience Act (ABLE) programs for tax years after December 31, 2014. These programs allow a tax free account to be created to save money for disability related expenses for a designated beneficiary. There is no federal income tax on the funds held in the account. Assets are contributed on an after-tax basis. The assets can then grow tax free. The money can be withdrawn tax-free if used for qualified disability related expenses. If the assets are used for nonqualified expenses, they are subject to income tax plus a 10% penalty. Each beneficiary is limited to one ABLE account and aggregate annual contributions to the account cannot exceed the annual gift tax exclusion, currently $14,000.00.
The IRS has recently issued proposed regulations that provide additional clarity to the law regarding ABLE accounts (further guidance is forthcoming from the Social Security Administration):
1) Under the new proposed regs, if a disabled individual is unable establish an ABLE account for themselves, the proposed regs make it clear that the eligible individual's attorney- in-fact, parent or legal guardian may establish the ABLE account. However, when acting on behalf of the account beneficiary, the agent may not have any beneficial interest in the account during the designated beneficiary's lifetime and must administer the account for the benefit of the beneficiary. (Prop Reg § 1.529A-2(c)(3))
2) When a qualified beneficiary moves, a qualified ABLE program may permit the beneficiary to continue to maintain his or her ABLE account that was created in that state, even after the beneficiary is no longer a resident of that state. (Prop Reg § 1.529A-2(o))
3) In order to ensure that only one ABLE account per beneficiary is created, a qualified ABLE program must require the beneficiary to verify, under penalties of perjury, when creating an ABLE account, that the account being established is the beneficiary's only ABLE account. (Prop Reg § 1.529A-2(c)(2)). Further, a prior ABLE account that has been closed does not prohibit the subsequent creation of another ABLE account for the same beneficiary.
4) The proposed regulations also provide guidance on the evidence required to determine eligibility. Eligibility is established by (a) receipt of Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits; or (b) a disability certification. Each qualified ABLE program may determine the evidence required to establish eligibility based on blindness or disability under the Social Security Act. If a disability certification is used, an eligible individual must present the disability certification, accompanied by the diagnosis, to the qualified ABLE program, and that certification will be deemed to be filed with IRS once the qualified ABLE program has received the disability certification. (Prop Reg § 1.529A-2(d)(1)).
5) A disability certification is one made by the individual, their parent or guardian and certified that the individual has medically determinable physical or mental impairment, which results in marked and severe functional limitations, and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind; and (b) that blindness or disability occurred before the individual attained age 26. The proposed regs provide that the phrase "marked and severe functional limitations" means the standard of disability in the Social Security Act for children claiming benefits under the SSI program based on disability, but without regard to the age of the individual.
6) Recertifications of the disability certicate must be provided annually to ensure the beneficiary continues to be an eligible individual. However, the program may identify certain permanent disabilities or impairments for which recertifications will be deemed to have been made annually until the program provides otherwise. (Prop Reg § 1.529A-2(d)(2))
7) Contributions in excess of the annual gift tax exclusion along with all net income generated by those excess contributions must be returned to the contributor. (Prop Reg § 1.529A-2(g)(4))
8) The general rules is that distributions from an ABLE account are not included in the beneficiary's gross income. However, if the distributions exceed the beneficiaries qualified disability expenses, a portion of the distributions from the ABLE account, as determined by the formula provided in the proposed regs, is includible in the gross income of the beneficiary. (Prop Reg § 1.529A-3(a))
9) The regs clarify that currently, a 529 plan for the designated beneficiary cannot be rolled into an ABLE account on a tax-free basis.
10) The IRS defines "qualified disability expenses" to permit the inclusion of basic living expenses and should not be limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. (Prop Reg § 1.529A-2(h)(1)) For example, expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism. (Prop Reg § 1.529A-2(h)(2))
11) Contributions to an ABLE account are a completed gift to the beneficiary. (Prop Reg § 1.529A-4(a)(1), Prop Reg § 1.529A-4(a)(3) ) No distribution from an ABLE account to the beneficiary of that account is treated as a taxable gift. (Prop Reg § 1.529A-4(b)) A change of beneficiary of an ABLE account, is a gift by the original beneficiary for gift and/or GST purposes, unless the new beneficiary is an eligible individual who is a sibling of the former beneficiary. (Prop Reg § 1.529A-4(a)(3), Prop Reg § 1.529A-4(c) ). The ABLE account is includible in the gross estate of the beneficiary for estate tax purposes under Code Sec. 2031. (Prop Reg § 1.529A-4(d))
The proposed regs are effective as of the date of their publication. While these are proposed regulations, states may enact legislation that is in accordance with Code Sec. 529A. The IRS will enable those state programs and accounts to be brought into compliance with the requirements in the final regs after they are issued. Until issuance of the final regs, taxpayers and qualified ABLE programs may rely on the proposed regs.
Additional information regarding ABLE accounts, can be found in our previous blog on 3.19.15 titled “Achieving a Better Life Experience Act (ABLE) Accounts”. For more detailed information on this or any area of law please contact our Estate Planning department.