Category Archives: Trusts

How to Use a Trust in Medicaid Planning

October 15, 2019

With careful Medicaid planning, you may be able
to  preserve some of your estate for your
children or other heirs while meeting Medicaid’s low asset limit.

The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in an irrevocable trust. A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries.” The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it.

A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.

Income-only trusts

An “irrevocable” trust is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be applied to benefit your or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.

You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.

You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.

One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a “special testamentary power of appointment” so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.

Remember, funding an irrevocable trust within the five years prior to applying for Medicaid (the “look-back period”) may result in a period of ineligibility. The actual period of ineligibility depends on the amount transferred to the trust.

Testamentary trusts

Testamentary trusts are trusts created under a will. The Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are considered unavailable.

Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.

Supplemental needs trusts

The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called “special needs trusts”) is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.

To find out whether a trust is the right Medicaid planning strategy for you, talk to your elder law attorney.

Who’s Charging What for Trust Services?

October 8, 2019

Trust fees are headed higher according to our pricing survey completed this week. Some firms work strictly from a rate card. Others decide what your client will pay when the business is placed on the table. Either way, it’s good to know what the “market value” of trust services.

There’s still a fair amount of mystery surrounding exactly what’s baked into each of those basis points. “It’s never as simple as just lining up the fees,” says Mike Flinn, a Phoenix-based trust consultant. “Once you start drilling down into the basis points, it becomes pretty clear that different firms really do different things,” he added. To find out where the sizzle hits the steak for various types of trust company, The Trust Advisor conducted a survey below of what they’re charging.

Who’s Charging What for Trust Services
Trust Company State Trust account minimum Minimum annual fee First $1 million Next $2 to $3 million $3 to $5 million Above $5 million
Advisory Trust DE $500,000 $3,000 0.50% 0.40% 0.30% 0.25%
Bryn Mawr Trust DE $1 million $6,000 0.60% * 0.45% Neg.
The New Hampshire Trust Company NH None $3,000 0.90% 0.55% 0.45% 0.35%
Northern Trust IL & DE $5 million $20,000 0.40% 0.40% 0.40% 0.20%
Reliance Trust GA None $3,000 0.60% 0.35% 0.35% 0.35%
Santa Fe Trust NM None $4,000 0.75% 0.75% 0.50% 0.35%
Saturna Trust Co. NV None $1,000 0.50% 0.50% 0.50% 0.40%
Summit Trust Co. NV $100 $100 1.00% 0.80% 0.70% Neg.
Wealth Advisors Trust Company SD None $4,000 0.50% 0.50% 0.42% 0.35%
Wilmington Trust DE $1 million $8,000 0.60% 0.40% 0.40% 0.25%
* Breakpoint is $2 million.

One thing we discovered: if you just want a no-frills account, Flinn adds, it’s probably going to cost at least $3,000 a year. “That’s really the minimum anyone can comfortably charge.”

“Maybe $2,500,” he conceded. “But at that level, it’s going to be very difficult to stay in the business.”

While $3,000 happens to be what Advisory Trust charges on the low end, it does seem to be an informal sweet spot within the trust industry. Other companies that start at that level include New Hampshire Trust and Georgia-based Reliance Trust.

There are companies that charge small accounts less (Nevada’s Summit Trust will go as low as $100 a year), but plenty start their fees at $4,000 and up. It all depends on the size of account they’re courting and what makes economic sense, Christopher Holtby, president of Wealth Advisors Trust Company, told me.

“Hitting the sweet spot is part art, part science,” he explains. “There are very specific things that every trust has to do, and everything else is extra.”

Good scale for big fish

Northern Trust doesn’t publish its fee scale, but president Dan Lindley was kind enough to give The Trust Advisor a peek.

Although the $20,000 minimum fee looks steep at first, it makes a lot more sense when you consider that Northern Trust isn’t really interested in personal directed trust accounts with less than $5 million in assets. For a client with that kind of wealth, the $20,000 translates into at most 40 basis points a year—pretty low by industry standards.

(Really big clients get institutional-strength discounts. Once a Northern Trust account grows beyond $30 million, the company will only charge 5 basis points: $500 a year per $1 million.)

The upshot is that by concentrating on high-end clients, a white-glove firm like Northern Trust can build a lot of sizzle into its steak, even though the cost per dollar of AUM is comparable to what bare-bones vendors charge.

“Northern Trust in Delaware charges a reasonable, competitive fee and in return provides comprehensive services to our directed trust clients backed by more than 120 years of experience as a fiduciary,” Lindley told me.

Other high-end trust companies argue that at this level, it’s pointless to advertise your fees because high-net-worth clients and their advisors are happy to pay for the service.

Some vendors refused to participate in the survey because they either work on an a la carte basis (Peak Trust) or figure out what to charge once they see the trust paperwork (Commonwealth Trust). As Peak Trust founder Douglas Blattmachr told me, it’s pointless to advertise how much a generic offering would cost when the fact is that at this level, one size fits none.

“It really does depend on what the client wants us to provide,” he says.

When asked to present a benchmark, he estimated that a relatively bare-bones Peak Trust account might charge 50 basis points a year or an annual minimum of $3,500. That’s about where vanilla Commonwealth trusts start, Jim McMackin, who runs the company’s marketing, told me.

Splitting smaller pies

Naturally, it’s going to cost extra if the trust company also manages the underlying assets. But there are a lot of vendors out there that are happy to offload the investment responsibilities and knock a bit off their fees in return.

Companies like Wealth Advisors Trust, Advisory Trust and Santa Fe Trust, cater exclusively to investment advisors looking for a place to refer their clients who need to open a trust.

Account minimums tend to be relatively low—Wealth Advisors Trust and Santa Fe Trust can theoretically start a trust with as little as $1—but expenses can be a little higher to cover the fixed cost of administering these tiny trusts.

For example, Santa Fe Trust accepts very small accounts, but according to its published fee scale it will still charge them at least $4,000 a year. At an annual fee of 75 basis points, this suggests that a trust really needs to have more than around $533,000 in it to “earn out” that $4,000 minimum fee.

By comparison, Wealth Advisors Trust’s scale “earns out” at a slightly higher level ($800,000 in the account), which indicates that its platform is built to support a somewhat more affluent clientele. Others on our list (Advisory Trust, Reliance, Saturna, New Hampshire Trust) justify their minimums at lower levels.

Whatever happens, says Kathy Roberts, the CEO of Santa Fe Trust, small accounts shouldn’t be loss leaders.

“We don’t take a trust that isn’t going to be profitable,” she told me.  While she’ll take on a tiny trust if the grantor insists, she warns that advisors should recognize that the trust company will pass on the cost of running it and sometimes it just doesn’t make sense.

Where we go from here

Most of the people I talked to say the cost of running a trust has already gone about as low as it can go.

Mike Flinn from Advisory Trust and Douglas Blattmachr of Peak Trust agree that the cost of fiduciary compliance and routine service probably isn’t going any lower than around $3,000 per trust any time soon, especially given the current trend toward higher regulation.

“It’s expensive to be a fiduciary,” Blattmachr acknowledged in our conversation. “So that provides a floor on what people can offer.”

But beyond that level, technology keeps improving and letting efficient trust companies bring down their overall cost proposition. Blattmachr says low-end players can use technology to better serve the mass market. Kathy Roberts of Santa Fe Trust agrees.

Either way, Christopher Holtby of Wealth Advisors Trust told me that there’s always room for enthusiastic competitors.

“Wherever fees go,” he says, “there are going to be a lot more entrants in the trust service business.”

Scott Martin, contributing editor, The Trust Advisor.  

Tips on Creating an Estate Plan that Benefits a Child with Special Needs

July 1, 2019

Parents want their children to be taken care of after they die. But children with disabilities have increased financial and care needs, so ensuring their long-term welfare can be tricky. Proper planning by parents is necessary to benefit the child with a disability, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility.

Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.

There are three main types of special needs trusts:

  • A first-party trust is designed to hold a beneficiary’s own assets. While the beneficiary is living, the funds in the trust are used for the beneficiary’s benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially useful for beneficiaries who are receiving Medicaid, SSI or other needs-based benefits and come into large amounts of money, because the trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
  • The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members, or to charity, without having to be used to reimburse the government.
  • A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.

Life Insurance
Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be an essential tool. If you’ve established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child’s care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents’ estate intact for other family members. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies.

ABLE Account
An Achieving a Better Life Experience (ABLE) account allows people with disabilities who became disabled before they turned 26 to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual with the disability or anyone else who may wish to give him money.

Created by Congress in 2014 and modeled on 529 savings plans for higher education, these accounts can be used to pay for qualifying expenses of the account beneficiary, such as the costs of treating the disability or for education, housing and health care, among other things. ABLE account programs have been rolling out on a state-by-state basis, but even if your state does not yet have its own program, many state programs allow out-of-state beneficiaries to open accounts. (For a directory of state programs, click here.)

Although it may be easy to set up an ABLE account, there are many hidden pitfalls associated with spending the funds in the accounts, both for the beneficiary and for her family members. In addition, ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI. If there are funds remaining in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits received by the beneficiary, and then the remaining funds will have to pass through probate in order to be transferred to the beneficiary’s heirs.

Get Help With Your Plan
However you decide to provide for a child with special needs, proper planning is essential. Talk to your attorney to determine the best plan for your family.

Protecting Your House from Medicaid Estate Recovery

July 1, 2019

After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” For most Medicaid recipients, their house is the only asset available, but there are steps you can take to protect your home.

Life estates
For many people, setting up a “life estate” is the simplest and most appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder.

Example: Jane gives a remainder interest in her house to her children, Robert and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of Robert and Mary, the remainder interest holders.

When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, Robert and Mary. Although the property will not be included in Jane’s probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when Robert and Mary sell the property because they will receive a “step up” in the property’s basis.

As with a transfer to a trust, if you transfer the deed to your home to your children and retain a life estate, this can trigger a Medicaid ineligibility period of up to five years. Purchasing a life estate in another home can also cause a transfer penalty, but the transfer penalty can be avoided if the individual purchasing the life estate resides in the home for at least one year after the purchase and pays a fair amount for the life estate.

Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest. In many states, once the house passes to the remainder beneficiaries, the state cannot recover against it for any Medicaid expenses that the ife estate holder may have incurred.

Trusts
Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Further, if properly drafted, the later sale of the home while in this trust might allow the settlor, if he or she had met the residency requirements, to exclude up to $250,000 in taxable gain, an exclusion that would not be available if the owner had transferred the home outside of trust to a non-resident child or other third party before sale.

Contact your attorney to find out what method will work best for you.

So, You’ve Been Appointed Trustee of a Trust? Here Are 9 Do’s and 1 Don’t

May 1, 2019

Whether it’s an honor or a burden (or both), you have been appointed trustee of a trust. What responsibilities have been thrust upon you? How can you successfully carry them out?

Here are nine do’s and one don’t to get you started:

  1. Do read the trust document. It sets out the rules under which you will operate, so you need to understand it completely.
  2. Do create a checking account for the trust. All income and expenses should go through this account. While you can and should invest the money, a checking account will enable you to make distributions and payments and keep track of them.
  3. Do keep the best interests of the beneficiaries in mind at all times. You have what’s called a “fiduciary” duty to them, which is an extremely high standard.
  4. Don’t have any personal financial dealings with the trust. For instance, you cannot borrow money from the trust or lend the trust money to anyone.
  5. Do provide the beneficiaries and anyone else indicated in the trust with an annual account of trust activity. This can be a copy of the checking and investment account statements or a more formal trust account prepared by an accountant or attorney.
  6. Do invest the trust funds prudently and productively. You cannot simply leave the trust funds in a savings account. And you can’t put them all into a promising new company. You need to diversify the trust portfolio among stocks and fixed income securities. It is wise to get professional investment advice.
  7. Do keep in regular contact with the beneficiaries to understand their needs.
  8. Do be aware of any public benefits the beneficiaries may be receiving and make sure you do not jeopardize the beneficiaries’ eligibility.
  9. Do file annual income tax returns for the trust.
  10. Don’t fly solo. Get professional advice to make sure you are correctly fulfilling your role.

A Comparison of 529 ABLE Accounts, Pooled Special Needs Trusts, and Special Needs Trusts

December 11, 2018

This article and the accompanying chart were originally published in 2016 by Joanne Marcus, MSW, and Theresa M. Varnet, MSW, JD.
The 2018 updates were provided by Karen Dunivan Konvicka, JD.

The ABLE Act allows an individual with a disability to have a tax-preferred savings account without jeopardizing his or her Medicaid and SSI eligibility. See a comparison chart of ABLE accounts and trusts at the end of this article.

Download PDF of article (19 pages)

Pet Trusts

November 27, 2018

courtesy of NAELA News:

Brian F. Mahoney, Esq.

By Brian F. Mahoney, Esq.

A pet trust, if written with care, can ensure the pet owner’s wishes for his or her pet are kept.

Pets are beloved and cherished and over time they become part of the family. This is especially true among seniors or people with disabilities whose pets or service dogs can become daily lifetime companions. Some of your clients will want to make provisions for the care of their pets. Since a beloved animal’s life and lifestyle is at risk and because money is involved, your client should take this very seriously.

A pet trust, if written with care, can make sure the pet owner’s wishes for his or her pet are kept.

I practice in Massachusetts, and pet trust laws vary by state.1 The Massachusetts statute has the following important limitations:

• Except as otherwise expressly provided in the trust instrument, no portion of the principal or income shall be converted to the use of the trustee, other than reasonable trustee fees and expenses of administration, or to any use other than for the benefit of covered animals.2
• A court may reduce the amount of property held by the trust if it determines that the amount substantially exceeds the amount required for the intended use and the court finds that there will be no substantial adverse impact in the care, maintenance, health, or appearance of the covered animal. The amount of the reduction shall pass as unexpended trust property in accordance with subsection (d).3

Limitations
Most statutes I have reviewed have limitations, so you must meticulously examine your state statute to determine if:

1. There is a limit on how much money you can set aside for a pet.
2. There is a specific time limit on the trust aside from the typical rule against perpetuities. Is the measuring life the animal’s life?
3. You can establish a stand-alone living pet trust, or if it has to be a testamentary trust in the Will.

Considerations When Writing a Pet Trust
I write this article less in regard to black letter law, and more toward how to draft a pet trust that includes many considerations.

Your client will want to establish a record of what the expenses could be and/or how the money would be used. Providing for a pet is expensive. Calculate all costs to determine the appropriate amount of funding required for the expected lifespan of the pet.

The following practical information will be needed in order to structure the pet trust document properly. Whenever possible, calculate a dollar amount that covers the life expectancy of the pet. You will need to know:

• The name and address of the pet.

• A specific description of the pet. Specifically identify the animal by category (dog, cat, pig, horse, etc.), breed, color, and weight (i.e. “… my dog, a 95-pound German Shepherd named Dutch. Please see the attached photo of Dutch taken in the year 2018, incorporated herein by reference).

• The name and address of the pet’s veterinarian and the pet’s health history. You will need information on injuries and illnesses and discuss potentially expensive medical treatment and how it should be handled. For example, some pet owners may love their animal dearly, but might not want to or be able to pay $3,500 for life-saving surgery.

• Include information on regular medications and immunizations including routine protocols for the animal such as tick prevention applications. Will the state law for immunizations be different in the state where the Trustee resides?

• The animal’s diet. What and how much does the pet eat? Feeding even a small animal gets expensive over time. If a 15-pound dog eats $3.50 per day of food, and its life expectancy is 4 years, food costs for four years would exceed $5,000.

• Who are the groomers, walkers, or animal-sitters? Identify them by name and address.

• Living conditions at home/lifestyle. What is the standard of living one wishes to provide for their pet? Is the pet housebound except for daily walks or is the pet outside in a fenced-in yard with a doghouse? If the pet is a housebound dog, how many times a day must the pet be brought outside for its bodily functions? How many walks per day should the pet have? If a dog walker charges $10 per walk for two walks per day, more than $7,000 per year will need to be left just for dog walking.

• The pet’s disposition: If the pet is a snarling, barking, nasty beast, then the Trustee should be instructed to keep that pet away from children or strangers.

• Where will the pet be cared for when the owner dies? Is there a facility where the animal would be sheltered until post death administration of their estate and/or pet trust is completed? What is the current daily rate of that facility? What happens if the Trustee travels once they possess the animal?

• If there are multiple pets, would it be possible for them to be kept together after death of the owner? If not, then you would need separate trusts or separate trust provisions per pet within the same pet trust document.

• Discuss Trustee compensation amounts. In regard to Trustee selection: A pet lover would be great as a Trustee because they would take the owner’s wishes more seriously than one who dislikes or is indifferent to animals. As with a human beneficiary, I tell clients to look for a trustee who is altruistic and will likely do the right thing.

• Shipping impacts the amount of funding needed for the trust. Will the pet need to be shipped to another town or another state where the Trustee resides? We recently called a major airline and were told the estimated rate to send a dog from Boston to California is $271 plus taxes. The animal may need a new kennel/crate. What does that cost?

• Does the Trustee live in another town or state? If so, then all the connections to the animal where it presently lives are relevant only to the extent to calculate estimated future cost for the animal’s shelter, food, medical care, grooming, walking, etc., over the animal’s life span.

• Disposition of a pet after its death. Will there be a burial or cremation?

• Be careful to name remainder beneficiaries.

Make the Trustee Aware of the Trust and Its Contents
In order for the client’s wishes for their pet to be followed, the client should discuss the Pet Trust with their trustee before signing the trust.

A pet trust contains virtually all the considerations inherent in providing for human beneficiaries and more. To be drafted properly, a trust requires a considerable amount of time and effort from the attorney and client. n

Citations
1 The American Society for the Prevention of Cruelty to Animals (ASPCA) website has a list of every state’s statute regarding Pet Trusts. See www.aspca.org/pet-care/pet-planning/pet-trust-laws.

2 M.G.L.A. 203E § 408(b).

3 M.G.L.A. 203E § 408(c).

About the Author
Brian F. Mahoney, Esq., is a member of the NAELA News Editorial board. He has been practicing law in Massachusetts since 1982.

Disability, Poverty, and the Policy Behind the ABLE Act

November 2, 2018

NAELA News:

By Nancy Susan Germany, Esq.

I. Introduction

The Achieving a Better Life Experience (ABLE) Act enables independence and self-reliance for
persons with disabilities. The act created the ABLE account, a powerful tool to help persons
with disabilities save money and control their own future. The ABLE account has become
enormously popular. States that have implemented ABLE programs report thousands of participants and millions of dollars being saved by persons with disabilities. Ohio opened the first ABLE program on June 1, 2016. Since then more than 34 states have started ABLE programs, with more states joining on a regular basis.

ABLE accounts allow persons with disabilities to save money without jeopardizing their
eligibility for public benefits. ABLE account income grows tax free and if spent on qualified
disability expenses (QDEs) remains tax free. Persons with disabilities are in control of theirown accounts, thus giving them more self-determination in their financial futures. This freedom to control their own money is a first for many persons with disabilities.

The ABLE account has rare bipartisan support and indicates Congress’s attempt to address the situation of people with disabilities who live in poverty, survive on meager incomes, and face asset limitations in an effort to maintain public benefit eligibility. The use of ABLE accounts will likely be expanded in the future.

Strict limitations apply to ABLE account use. An ABLE account can only be used by persons disabled prior to age 26 and must be funded with cash. The maximum funding amount each year is limited to the annual gift tax exemption amount ($15,000 in 2018). For Supplemental Security Income (SSI) eligibility purposes, an ABLE account is exempt up to $100,000; for Medicaid-only eligibility purposes, it is exempt up to a state’s 529 plan limit. If ABLE account income is spent on non-QDEs, it is taxed, and a penalty is assessed, and on the death of the person with a disability, payback to the state Medicaid agency applies. Due to these limitations, the ABLE account is not enough to break the cycle of poverty for many persons with disabilities. It does, however, provide some relief and can be used as part of an effective special needs plan.

This article reviews how the ABLE account came into existence, compares ABLE accounts with special needs trusts (SNTs), and discusses ABLE account legal requirements, how various federal agencies have interpreted ABLE accounts, and the options available in states’ ABLE programs.

II. ABLE Accounts Are the Latest Attempt to Reduce Historic and Systemic Poverty for Persons With Disabilities

A. Disability and Poverty
Persons with disabilities live in poverty and are unemployed and underemployed at a far higher rate than people without disabilities. One study concludes, “Disability and poverty are intricately linked as both a cause and consequence of each other.”1 The number of people with disabilities increased from 11.9 percent in 2010 to 12.8 percent in 2016.2In other words, in 2016, 40,890,900 of the 319,215,200 individuals of all ages in the United States reported having one or more disabilities.3

The number of people with disabilities, which depends on how the term “disability” is defined, is sometimes difficult to assess. The World Health Organization (WHO), which has conducted numerous studies on this issue, defines disability “not necessarily by a person’s defined medical condition, but by an environment that erects barriers to [his or her] participation in the social and economic life of their communities.”4 The Cornell University Yang-Tan Institute on Employment and Disability obtains its information on persons with disabilities from three data sources: the American Community Survey, Current Population Survey, and 2000 Census.5

People with disabilities have a high rate of unemployment. In 2016, the employment rate for working age people with disabilities was 36.2 percent versus 78.9 percent for persons without disabilities.6 In 34 states, an employment gap of 40 percent or higher exists between employed people without disabilities and employed people with disabilities.7 People with disabilities also work full-time at a much lower rate (23 percent) than persons without disabilities (59.4 percent).8

The number of people with disabilities living in poverty is staggering. In 2016, 5,323,500 persons with disabilities were living in poverty and at a significantly higher rate than those without disabilities.9 From 2009 through 2016, the percentage of people with disabilities living in poverty ranged from 20.9 percent to 23 percent.10 The percentage of people without disabilities living in poverty ranged from 13.1 percent to 15.1 percent.11 The percentage of working age persons with disabilities living in poverty was 26.6 percent, while the percentage of those of the same age without disabilities living in poverty was 10.9 percent.12 In 2016, the median earnings of Americans with disabilities ages 16 and older was $21,572; the median earnings of those without disabilities was $31,874.13

Because so many people with disabilities are living in poverty, are unemployed, or are unable to work, they rely on public benefits to help them pay for food, shelter, and medical care.

B. Public Benefit Programs’ Income and Asset Limits Make Saving Money Difficult for Persons With Disabilities

Many people with disabilities use SSI to help pay for their food and shelter. In 2016, 3,858,100 working age persons with disabilities used SSI to meet their primary needs.14 The issue with SSI is that for an individual with a disability to qualify, his or her countable assets cannot exceed $2,000; this amount is $3,000 for a couple.15 This limit has not changed since 1989 and is not indexed for inflation.16

Given the resource and income limitations imposed by means-tested public benefit programs, there has long been a need for a program that offers options for people in the disability community to have access to or save assets and not be forced to spend down every month in order to retain benefits eligibility. The issue was described in an earlier NAELA Journal article:

After all, a $2,000 limit on resources makes it virtually impossible to save in order to fix a roof, deal with a plumbing emergency, or repair a car without running afoul of these asset limits. Requiring individuals to spend down virtually all of their resources before they can qualify for needed long-term services and supports takes away the minimal safety net that anyone living in the community requires. It raises the specter that even a small emergency or unplanned expense can cascade into a crisis, potentially forcing an individual to move into an institution or worse, become homeless. The limit also discourages responsible planning. Advocates frequently report cases in which an individual, seeking to do the right thing, saves up from his or her minimal income for an anticipated expense and instead ends up losing coverage or facing an overpayment requirement.17

C. The ABLE Act Was Designed to Help People With Disabilities

The ABLE Act recognizes the special financial burdens on persons with disabilities and the struggles they face in achieving and sustaining a meaningful quality of life. The stated purpose of the ABLE Act is as follows:

(1) To encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life.

(2) To provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, the Medicaid program under title XIX of the Social Security Act [42 U.S.C. 1396 et seq.], the supplemental security income program under title XVI of such Act [42 U.S.C. 1381 et seq.], the beneficiary’s employment, and other sources.18

Simply put, this act is intended to improve the quality of life for persons with disabilities and their families who depend on various forms of public benefits to provide income, health care, food, and housing assistance. As described previously, eligibility for these public benefits typically requires the person with a disability to have less than $2,000 in countable assets. For the first time, legislation, in the form of the ABLE Act, recognizes the significant hardships of living with a disability. These hardships include paying the costs related to raising a child with a disability and the costs a working age adult with a disability must pay for accessible housing, reliable transportation, personal assistance services, assistive technology, and health care not otherwise covered.

For the first time, eligible individuals and their families have the opportunity to establish ABLE accounts, which will not affect their eligibility for SSI, Medicaid, and other public benefits. An ABLE account is a tax-advantaged savings plan for people with disabilities who were disabled or blind prior to age 26.19 The person with a disability is the ABLE account owner, and income earned by the account is not taxed. Contributions to the account may be made by any person (e.g., person with a disability, family member, friend, SNT trustee) using after-tax dollars. The contributions are not tax deductible, although some states may allow for state income tax deductions.20

As a result of these features, ABLE accounts have become very popular for persons with disabilities. In the fourth quarter of 2017, the number of ABLE accounts grew by 31 percent. As of this writing, 17,314 accounts exist, with $72 million in assets.21 This number is expected to significantly rise as more states open ABLE programs.

III. The ABLE Act’s History

On December 19, 2014, President Obama signed the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014 into law as part of the Tax Increase Prevention Act of 2014. The ABLE Act was initially sponsored in 2007 by Rep. Ander Crenshaw, R-Fla. At that time, it was called the Financial Security Accounts for Individuals With Disabilities Act of 2007 (H.R. 2370). It underwent many changes. The second version of the bill, later known as H.R. 1205, became the ABLE Act and was introduced in February 2009 with bipartisan support of 203 members of Congress. However, without any action, H.R. 1205 died at the end of the 111th Congress.22 In the 112th Congress, the ABLE Act of 2011, H.R. 3423, was introduced in November 2011 and gained the support of 235 House members. However, it did not have enough support to go to committee or the House floor.

In its third round, in February 2013, the final draft of the ABLE Act was reintroduced in the 113th Congress as the ABLE Act of 2014, H.R. 647. The final version included minor changes, and H.R. 647 gained 380 co-sponsors in the House (194 Republicans and 186 Democrats).23 Its Senate counterpart, Sen. 313, gained 76 Senate co-sponsors (29 Republicans and 47 Democrats).24 The bill passed the House in December 2014 by a vote of 404 to 1725 and in the Senate by a vote of 76 to 16.26

In more recent legislation, under the 2017 Tax Cuts and Jobs Act,27 funds from a 529 plan can now be rolled over into an ABLE account.28 This rollover counts toward the $15,000 funding limit. The new law also gives an account owner who works the right to contribute up to $12,060 in earnings above the $15,000 funding limit.29 Finally, the new law allows ABLE account owners who contribute to their own accounts to take advantage of the Retirement Savings Contributions Credit, which provides a special tax break to low- and moderate-income taxpayers who are saving for retirement.30

IV. ABLE Account Legal Requirements

The ABLE account was established under § 529 of the Internal Revenue Code and in some ways is similar to the traditional 529 college savings account. However, there are significant differences, as described below.

A. ABLE Account Age and Disability Requirements
An ABLE account is started and owned by a designated beneficiary, who is a qualified person with a disability that occurred prior to age 26.31 The designated beneficiary can establish disability in one of two ways:

1. By showing, based on a disability that began before age 26, that he or she is currently eligible for Social Security Disability Insurance (SSDI) or SSI disability benefits; or

2. By certifying, or having a parent or guardian certify, that he or she has a medically determinable impairment that “results in marked and severe functional limitations” that has lasted or is expected to last for 12 consecutive months or is likely to result in death, with the disability or blindness occurring before age 26.32

If an individual is not already receiving SSI or SSDI, he or she must meet the Social Security Administration (SSA) definition of “disability”:

[A] medically determinable physical or mental impairment or combination of impairments that causes marked and severe functional limitations, and that can be expected to cause death or that has lasted or can be expected to last for a continuous period of not less than 12 months.33

For persons who are not already receiving SSI or SSDI, the ABLE Act requires that the certification of disability be filed with the Treasury secretary.34 The proposed regulations defined this requirement to mean that the individual, his or her agent under power of attorney, or his or her parent or guardian must certify under penalty of perjury that he or she has a “signed physician’s diagnosis” documenting the disability and will provide it if requested by the ABLE plan administrator or the IRS.35 This means that eligible individuals with disabilities will not have to provide the written diagnosis when opening an ABLE account and ABLE programs will not have to receive, retain, or evaluate detailed medical records. It also means that submission of a doctor’s letter is not necessary unless requested.

B. Opening and Contributing to an ABLE Account
An individual opens an ABLE account by joining a state ABLE program.36An account may be opened by the designated beneficiary or his or her agent, guardian, or parent (if a minor).37 There is no minimum age for setting up an ABLE account; therefore, even very young children may have one. However, the ABLE account is always owned by the designated beneficiary.38 Moreover, a designated beneficiary is permitted to have only one ABLE account.39 If more than one account is opened, the subsequent account is considered countable by the public benefit agency and provides no tax benefit to the person with a disability.40 However, if all amounts contributed to a subsequent ABLE account are returned in a timely manner, the account is treated as if it had never been opened.41

An ABLE account can only be funded with cash.42 If, however, funds are rolled over from one ABLE account to another for the benefit of the designated beneficiary, the rollover amount is considered an in-kind contribution and thus is not taxed.43 Any person can contribute to an individual’s ABLE account, including the person with a disability.44“Person” is defined to include a trust or estate.45 At this time, there is no prohibition on an SNT funding an ABLE account.46 The contribution to an ABLE account is also deemed a completed gift for gift tax purposes.47

There is no federal income tax deduction on ABLE account contributions, but some states’ programs authorize a state income tax deduction.48 As different states implement ABLE programs across the nation, some states have enacted laws that allow state tax deductions for contributions to ABLE accounts for their residents.49 For example, in Iowa, the maximum deductible account contribution is $3,128, and in Michigan, the amount is $5,000 for individuals and $10,000 for joint filers.50

Each year, an ABLE account can only be funded up to the single annual federal gift tax exclusion amount (as set forth in I.R.C. § 2504(b)), which is currently $15,000.51 This annual limitation applies to the total annual amount contributed to the account on an aggregate basis. This amount is expected to increase every few years because it is adjusted for inflation.

The original ABLE Act required beneficiaries to open ABLE accounts in their home states only. However, when Congress amended the ABLE Act in December 2015 as part of the tax extenders package, it eliminated the home state residency requirement.52 Now, an individual can open an ABLE account in any state that offers a nationwide ABLE program. To determine which state ABLE programs are accepting out-of-state enrollment, see the individual state pages on the ABLE National Resource Center website.53 State ABLE programs accepting enrollment nationwide include Ohio and Nebraska. Florida is an example of a state whose ABLE program accepts in-state residents only.

C. ABLE Account Size Limit
The limit on the size of an ABLE account is based on the needs-based public benefits the individual is receiving. The funds in an ABLE account are not counted toward the resource limit for any federally funded benefit that has at least one financial criterion for eligibility.54 If the designated beneficiary receives SSI, the ABLE account may grow up to $100,000 and is not counted as a resource for SSI eligibility.55

If an ABLE account grows to more than $100,000, the designated beneficiary’s SSI benefits are not terminated. Rather, the SSI benefits are suspended until the ABLE account balance drops below $100,000, at which point the SSI benefits resume.56 A suspension of SSI benefits due to too much money in an ABLE account does not mean an immediate loss of Medicaid benefits.57 Medicaid eligibility and benefits will continue uninterrupted.

The Social Security Program Operations Manual System (POMS) provides an example:

EXAMPLE: Excess resources — recipient is suspended but retains eligibility for Medicaid

Paul is the designated beneficiary of an ABLE account with a balance of $101,000 on the first of the month. Paul’s only other countable resource is a checking account with a balance of $1,500. Paul’s countable resources are $2,500 and therefore exceed the SSI resource limit. However, since Paul’s ABLE account balance causes him to exceed the resource limit (i.e., his countable resources other than the ABLE account are less than $2,000), Paul’s SSI eligibility [is suspended] and his cash benefits [are stopped], but he retains eligibility for Medicaid in his State.58

Under the ABLE Act, if the designated beneficiary is receiving Medicaid only, not SSI, the ABLE account may grow up to the state’s limit under its qualified state tuition program (i.e., 529 plan).59 The dollar limits of what can be retained in an ABLE account vary by state. For example, Nebraska’s account limit is $400,000; Nevada’s limit is $370,000; and Michigan’s limit is $500,000.60

D. The ABLE Act’s Payback Requirement
The ABLE Act states that when a designated beneficiary with assets in an ABLE account dies, the assets are subject to “payback” to the state Medicaid program, up to the value of the Medicaid services provided to the beneficiary from when the account was opened to the filing of a claim by the state.61 The state is considered a creditor of the ABLE account and not a beneficiary.62

The payback amount is calculated after:

• All outstanding QDEs for the designated beneficiary are paid,

• Funeral and burial expenses for the designated beneficiary are paid, and

• Medicaid premiums paid by the beneficiary are subtracted.63

Despite the federal law, several states have passed laws stating that the state will not seek payback from an ABLE account on the death of a designated beneficiary.64 At this point, it is not known whether these laws will be successful.

E. ABLE Account Tax Treatment and Qualified Disability Expenses
An ABLE account receives tax treatment similar to that of a traditional 529 college savings plan. Income earned in an ABLE account grows tax free.65Distributions from an ABLE account for the payment of QDEs are also not taxed.66 The ABLE Act defines QDEs as “expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.”67 It then lists a range of categories of potential uses for funds set aside in ABLE accounts, including the following:

education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section.68

In the proposed regulations released in June 2015, the IRS stated that QDEs should be “broadly construed to permit … basic living expenses and should not be limited to expenses for which there is a medical necessity or which provide no benefits to others” and should include any benefit related to the designated beneficiary “in maintaining or improving his or her health, independence, or quality of life.”69 A new computer with adaptive technology that could improve the beneficiary’s general well-being is a good example of a potentially allowable expense. It is important to note that distributions for recreation appear limited and distributions for housing must be administered very carefully, as detailed later in this article.

A penalty is incurred if an ABLE account recipient makes a distribution for non-QDEs. Distributions for non-QDEs are considered gross income and subject to a 10 percent penalty.70 Following are a few exceptions to incurring the penalty:

• The penalty does not apply to any distribution made from an ABLE account on or after the designated beneficiary’s death to the designated beneficiary’s estate, heir or legatee, or creditor.71

• The penalty does not apply if the ABLE account refunds excess account contributions.72

F. ABLE Account Investment Options

Similar to state 529 college savings plans, states offer qualified individuals and families multiple options for establishing ABLE accounts with varied investment strategies.73 People with disabilities and their families need to project future needs and costs over time and to assess their risk tolerance when selecting investment strategies. The ABLE Act limits account contributors and designated beneficiaries from changing the way their money is invested to two times per year.74

G. ABLE Administrator Reporting Requirements
ABLE administrators are required to report monthly to SSA and Medicaid regarding any ABLE account distributions made for QDEs. When an ABLE account is established, the following information must be provided to the SSA:

• Name of the designated beneficiary

• State ABLE program administering the account

• Name of the person who has signature authority (if different from the designated beneficiary)

• Unique account number the state assigns to the ABLE account

• Account opened date

• First-of-the-month account balance or information sufficient to derive a first-of-the-month balance75

Reporting to SSA is required monthly; however, it is unclear how SSA will monitor these reports, given the number of ABLE accounts and the staffing necessary, or whether accounts will be subject to random auditing.

V. Federal Administrative Guidance for ABLE Accounts

Department of the Treasury ABLE account regulations state that, in general, neither the ABLE account nor distributions from the account will be treated as income or resources in determining a designated beneficiary’s eligibility for any federal benefit program. Several federal agencies have provided guidance on the use of ABLE accounts, including SSA, the Centers for Medicaid & Medicare Services (CMS), and the U.S. Department of Agriculture (USDA). Although other agencies have not provided guidance, an ABLE account should be exempt for any federal program that has an income or resource eligibility standard.

A. SSA POMS Guidance on ABLE Accounts
The most comprehensive guidance on ABLE accounts issued thus far is the SSA POMS. The POMS is a primary source of information SSA employees use to process claims for Social Security benefits, including SSI. While the POMS does not have the force of law, courts do defer to SSA’s interpretation of the law.76 SSA issued POMS SI 01130.740 (Achieving a Better Life Experience (ABLE) Accounts) and updated it on March 7, 2018.77 It provides a thorough overview of how SSA treats ABLE accounts for SSI eligibility purposes.

The ABLE POMS is organized as follows:

A. What is an ABLE Account?

B. Definition of ABLE terms

C. When to exclude ABLE account contributions, balances, earnings, and distributions

D. When to count ABLE account balances and distributions

E. How to verify, document, and record ABLE account balances

F. How to verify, document, and record ABLE account distributions

G. Handling and recording ABLE prepaid debit card information

The POMS makes several interesting clarifications concerning the use of ABLE accounts, stating that contributions to an ABLE account are exempt, even if made from a trust.78 Thus, an SNT trustee is authorized to make contributions to a beneficiary’s ABLE account. Factors a trustee should consider when making such a contribution are discussed below.

The POMS states that all distributions from an ABLE account will not be treated as public benefit “income.”79 Instead, it will be treated as a conversion of a resource. This is an important distinction, because if a distribution is made from an ABLE account, even if not for a QDE,80 the SSI recipient will not be penalized by SSA’s income rules for public benefit eligibility purposes. These rules can be difficult to understand because many people confuse the word “income” with how the IRS defines the word. The definition of income is different for SSI eligibility purposes. In general, SSA will reduce the SSI recipient’s monthly check by the receipt of SSA income.81 Income is generally defined for Social Security benefit purposes as either earned82 or unearned.83 For example, any money received by the beneficiary directly will be considered unearned income to the beneficiary under the SSI rules, and, after a set-aside of the first $20 each month, will reduce his or her SSI benefits on a dollar-for-dollar basis.84 For example, if an SNT trustee distributes $500 from the trust directly to a beneficiary who is an SSI recipient, the recipient would lose $480 from the monthly SSI check. If instead, the SSI recipient receives $500 from an ABLE account, there would be no reduction of the monthly SSI check as unearned income because it would be treated as a transfer of a resource, not income. As stated in the POMS:

Do not count distributions from an ABLE account as income of the designated beneficiary, regardless of whether the distributions are for a QDE not related to housing, for a housing expense, or for a non-qualified expense.85

Thus, as another example, if an SNT trustee pays for a recipient’s food, a penalty is triggered under SSA’s in-kind support and maintenance (ISM) rules (described below). However, because ISM is a type of SSI income, if an ABLE account pays for food, there is no ISM penalty. As discussed below, there may be a resource issue, but there is no SSI income issue even if the distribution is made for a non-QDE.

The POMS also provides a unique treatment of paying for housing expenses from an ABLE account. The POMS defines “housing expenses” the same way it defines “shelter,” with the exception of food.86 To understand the distinction, a brief discussion of how SSA treats the receipt of food or shelter by an SSI recipient is necessary.

If an SSI recipient receives “food or shelter, or something the recipient can use to get one of those [two] items” from another person, the recipient will have income in the form of ISM.87 SSA will penalize the SSI recipient for receipt of such income.88 The recipient’s SSI benefits will be reduced by (1) the lesser of one-third of the federal benefit rate (FBR) plus the $20 general income exclusion or (2) the actual value of what was received.89Thus, in 2018, if an SNT trustee pays the SSI recipient’s rent in the amount of $1,000 per month, SSA will reduce the recipient’s monthly SSI check by $270 per month.90 However, if the rent is paid out of the ABLE account, there is no ISM penalty. Therefore, an SSI recipient whose monthly rent is paid by someone else could instead transfer that money to an ABLE account, pay his or her monthly rent, and have an additional $3,240 per year to spend on other items. However, as described in the following example, the rent payment must be made in the same calendar month as the ABLE account disbursement or SSA will count it as a resource.

Ellie, a 24-year-old woman who has Down syndrome, has lived with her parents her entire life. Recently, the family moved from Ohio to Denver. When the family lived in Ohio, Ellie’s parents opened an ABLE account for her.

Recently, Ellie, who receives SSI and Medicaid, got a part-time job at Target. Therefore, she has to abide by strict income and asset requirements to maintain her SSI and Medicaid eligibility. Through her job coach, Ellie made two very close friends, Sally and Linda, who also receive public benefits. Like Ellie, both Sally and Linda work part-time. The women decided that they would like to move into an apartment together near where they work. Currently, Ellie receives $735 per month from SSI and approximately $370 per month from working at Target. Unfortunately, rent in Denver averages $2,900 per month for a three-bedroom apartment.

Ellie’s parents settled a third-party SNT when Ellie was 12 and have been contributing to it ever since. Recently, they closed Ellie’s Ohio ABLE account and opened an account in Colorado. To afford Ellie’s share of the rent, Ellie’s parents set up a plan in which, as trustees of Ellie’s SNT, they transfer $1,000 per month from her trust account into the ABLE account on the first of every month (her rent is due on the third of the month). On the second of the month, they help Ellie pay her rent from her ABLE account. There is no reduction in Ellie’s SSI check, and she has a safe place to live.

The POMS provides an interesting analysis of how ABLE account distributions are treated. SSA treats distributions depending on whether they are for QDEs, housing expenses, or non-QDEs. In general:

• Disbursements made for QDEs (except housing expenses) will remain exempt even if retained by the recipient after the month of disbursement as long as the disbursement is later made for a QDE (that is not a housing expense).91

• Disbursements made for a QDE that is a housing expense will be exempt in the month made, but if the disbursement is retained by the recipient beyond the month of disbursement, it will be treated as a countable resource, even if later used for housing expenses.92

• Disbursements made for a non-QDE will be exempt in the month made, but if retained by the recipient beyond the month of disbursement will be treated as a countable resource.93

For example, if the SSI recipient takes an ABLE account distribution of $20,000 to pay for a wheelchair in March and holds the money in his or her checking account until June — and then pays for the wheelchair — the entire $20,000 is exempt for all months it was held. The funds do not need to be segregated; the ABLE account disbursement can be commingled with the SSI recipient’s other funds.94

If instead the SSI recipient takes an ABLE account distribution of $2,000 to pay for rent and utilities in March and uses $1,000 to pay for rent and utilities in April, the entire $2,000 will be counted as a resource for the month of April (thus disqualifying the SSI recipient from April’s SSI check). If the SSI recipient uses the remaining $1,000 to pay for May rent and utilities, this $1,000 will be counted as a resource for May. If the SSI recipient’s other countable resources add up to more than $2,000, he or she will lose May’s SSI check. The lesson here is that if the SSI recipient had used the entire $2,000 in March, there would have been no loss of SSI. It is important that an ABLE account disbursement to pay for housing expenses be used to pay those expenses in the same calendar month of the disbursement.

The distribution from an ABLE account for a non-QDE is also interesting. For example, if a $10,000 disbursement is made from an ABLE account in April to be used for gambling in Las Vegas and the entire amount is used in April, there is no penalty of loss of SSI.95 An IRS income tax penalty of ordinary income plus 10 percent96 could be assessed — with no effect on the SSI check. If, however, $3,000 remains on May 1, the $3,000 would be counted as the SSI recipient’s resources and would disqualify the recipient from his or her SSI check for that month.

The SSA POMS treats a disbursement made for a QDE and retained by the SSI recipient differently if the intent behind the disbursement changed. For example, as stated in the SSA POMS:

In June, Jennifer takes a $7,000 distribution from her ABLE account to pay an educational expense that is a QDE. Her educational expense is due in September. In August, Jennifer gets a job offer and decides not to return to school. The $7,000 becomes a countable resource in September because she no longer intends to use it for an educational expense that is a QDE, unless Jennifer re-designates it for another QDE or returns the funds to her ABLE account prior to September.97

B. Director’s Letter on ABLE Accounts
The CMS Center for Medicaid and CHIP (Children’s Health Insurance Program) Services director issued a letter to state Medicaid directors, Implications of the ABLE Act for State Medicaid Programs, which addresses individuals whose Medi­caid eligibility is determined by their modified adjusted gross income (MAGI) and those whose Medicaid eligibility is determined by non-MAGI sources.98 The letter states that even for Medicaid without resource limitations, ABLE account earnings and distributions will have no impact on the income calculation for eligibility for MAGI-based Medicaid. However, if distributions are made for non-QDEs, those disbursements may be counted as income when calculating Medicaid eligibility.99

The letter also makes it clear that SNT contributions to an ABLE account will be treated as qualifying contributions and not count against the SNT beneficiary. As stated in the letter:

Some ABLE account beneficiaries may also be a beneficiary of a special needs trust (SNT) or pooled trust, as described in section 1917(d)(4) of the Act. Distributions from such trusts made on behalf of the trust beneficiary to the beneficiary’s ABLE account should be treated the same as contributions to ABLE accounts from any other third party. Thus, while disbursements from an SNT or pooled trust can be considered in some circumstances income to the trust beneficiary, disbursements from an SNT or pooled trust to the ABLE account of the trust beneficiary are not counted as income under section 103. Therefore, states should disregard as income a distribution from an SNT or pooled trust that is deposited into the ABLE account of the SNT or pooled trust beneficiary.100

C. USDA’s Treatment of ABLE Accounts for Determining Supplemental Nutrition Assistance Program Eligibility
The director of the Program Development Division, Supplemental Nutrition Assistance Program (SNAP), initially issued a letter to regional directors stating that ABLE accounts are exempt for purposes of determining eligibility for SNAP, historically known as the food stamp program.101 Regulations were then issued in January 2017 stating that ABLE account assets are also considered excluded resources for determining SNAP eligibility.102

VI. Comparing ABLE Accounts With Special Needs Trusts

It is important to compare ABLE accounts with SNTs to understand the differences between them. Some people believe that an ABLE account is an SNT replacement; however, this belief is incorrect. An ABLE account is an additional planning tool, but it does not offer the same level of protection for persons with disabilities as SNTs.

For many years, the SNT has been the primary planning tool for persons with disabilities.103 Through the years, special needs planners have created a variety of ways to allow persons with disabilities to lead more than a subsistence existence, including various trusts to hold money for the benefit of persons with disabilities. These trusts came of age when Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), which provided exceptions to transfer penalties and eligibility rules for Medicaid for three unique trusts:104

1. A trust that contains the assets of a disabled individual under age 65, established for the benefit of the individual by the individual, a parent, a grandparent, a legal guardian, or the court, in which the state Medicaid agency receives all amounts remaining in the trust on the beneficiary’s death up to the amount of benefits paid.105 This trust is commonly known as a “(d)(4)(A) SNT.”

2. A trust that is composed only of pension, Social Security, and other income in a state that does not allow income “spend-down.”106 This trust is commonly known as a “Miller trust” (after Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990)).

3. A trust containing the assets of a disabled individual (a) established and managed by a nonprofit corporation and in which separate accounts of pooled assets are maintained; (b) established by a parent, a grandparent, a legal guardian, the individual, or the court; and (c) in which the state, on the beneficiary’s death, receives all amounts remaining in the beneficiary’s account (unless the account is retained by the nonprofit corporation) up to the amount of Medicaid benefits paid.107 This trust is commonly known as a “pooled SNT.”

The same trust exceptions were expressly adopted for SSI in 1999.108 The statute also created an exception for trusts set up using other people’s assets, typically assets from an inheritance. This trust is commonly called a third-party SNT.109

SNTs have many benefits. SNTs can be funded with any amount and preserve an individual’s eligibility for public benefits. SNTs can hold all types of assets, including real estate and other noncash assets. For persons who lack capacity or have diminished capacity, SNTs provide additional protection. For example, an SNT requires the trustee to follow a discretionary standard when making distributions. A good trustee provides a great deal of oversight and consideration of public benefit eligibility requirements prior to making distributions from an SNT. Due to the nature of the SNT, there is also spendthrift and creditor protection, frequent accountings, and possible asset protection. The protection afforded by an SNT provides a barrier between potential financial predators and the beneficiary’s assets.

An SNT, however, can have significant costs associated with establishing and administering it. It may require paying an attorney to assist in its establishment and certified public accounts and other professionals to assist in its administration. Plus, persons with disabilities cannot be in control of their own SNTs, even if they have the capacity to manage their own financial affairs.

In comparison, ABLE accounts are relatively simple and inexpensive to set up. They give persons with disabilities the autonomy to control their own finances, and persons over the age of 65 can use them without incurring a penalty or losing public benefits. However, use of ABLE accounts is limited to persons disabled before age 26 (which precludes a substantial number of persons with disabilities from using them). An ABLE account can only own cash and can only be funded up to $15,000 per year. If a person with a disability has countable real estate, other noncash assets, or assets greater than $15,000, an SNT still needs to be used.

An ABLE account also has little to no oversight on distributions and lacks a discretionary distribution standard. The person with a disability, therefore, can request the funds for any purpose, even for non-QDEs. Plus, if the person with a disability is subject to undue influence, there is no barrier protecting his or her funds from potential predators. There also is no creditor protection for an ABLE account. Unlike a discretionary spendthrift trust, an ABLE account is an asset belonging to the beneficiary and therefore can be fully attached by creditors and even ex-spouses. The $15,000 per year aggregate contribution limit may be difficult to manage because multiple contributors must coordinate their efforts to avoid exceeding the contribution limit.

Funding an ABLE account is not always in the best interest of an SNT beneficiary. An SNT beneficiary with diminished capacity may be unable to manage the money or be vulnerable to financial predators. An ABLE account may be the first time a beneficiary has ever had to manage money. It may be difficult for him or her to recognize the need for keeping accurate records, spending prudently, and following the rules.

Special needs planners should, depending on the circumstances, consider additional tools to assist in the administration of ABLE accounts, such as the use of guardians, conservators, agents, professional bookkeepers, other fiduciaries, and case managers. This will ensure increased transparency and communication with the person with a disability regarding the use of his or her ABLE account distributions and help avoid issues with fraud, exploitation, and public benefit ineligibility.

VII. Comparing ABLE Programs
State ABLE programs vary widely in investment opportunities, ease of use, and cost. It is important for the special needs practitioner to know how to compare the different ABLE programs. The best way to do this is to use the ABLE National Resource Center’s website, which has a tool for comparing programs.110 It can evaluate up to three programs at a time, providing answers to the following questions, which, according to the center, are important questions that should be asked:

• Opening an Account

» Is there a minimum contribution to open an ABLE account?

» Is there a fee to open an account and, if so, how much is it?

» What proof does the ABLE program require for opening an account or showing that disbursements are qualified expenses?

» Maintaining the account and fees

» What type of fees are associated with the account?

» Are there restrictions on how often withdraws can be made?

• Investment Opportunities

» What investment options does the state ABLE program offer?

» Does the program offer any unique or value-added elements to help beneficiaries save, contribute to the account, grow the account, and manage the investments (e.g., a match or rewards program, financial literacy information or program for beneficiaries)?

• Unique to State

» Does the state offer a state income tax deduction for contributions to the account?

» Does the program offer a debit card/purchasing card? If so, are there added costs for this?

VIII. Conclusion

An ABLE account provides unique options for planning that were not possible before. However, special needs planners need to approach these accounts prudently, thoroughly evaluating how these accounts may be used and how they complement other aspects of a special needs plan. It is crucial for planners to fully educate clients about the advantages and disadvantages of ABLE accounts and to provide their professional support and oversight as part of an effective special needs plan.

The future of ABLE accounts looks bright. These accounts offer people with disabilities and their families an exciting, affordable prospect for planning and saving.

Citations
1 Jeanine Braithwaite & Daniel Mont, Disability and Poverty: A Survey of World Bank Poverty Assessments and Implications, 3(3) ALTER – European J. Disability Research 219, 220 (2009).

2 L. Kraus et al., 2017 Disability Statistics Annual Report (U.N.H. 2018).

3 W. Erickson et al., 2016 Disability Status Report: United States (Cornell U. Yang-Tan Inst. on Employment & Disability 2018).

4 Braithwaite & Mont, supra n. 1, at 220.

5 See Cornell U., Disability Statistics, http://www.disabilitystatistics.org(accessed June 13, 2018).

6 Id. at 29.

7 Kraus et al., supra n. 2, at 18.

8 Erickson et al., supra n. 3, at 35.

9 Id. at 42.

10 Id. at 23.

11 Id.

12 Id. at 41.

13 Kraus et al., supra n. 2, at 3.

14 Id. at 43. In 2016, the percentage of working age people with disabilities receiving Supplemental Security Income (SSI) payments was 19.2 percent, or 3,858,100 people.

15 20 C.F.R. § 416.1201(a). Certain assets are not counted, such as a principal residence, one automobile, household items, and a few other items. See 42 U.S.C. § 1382b(a).

16 “When the SSI program began in 1974, the asset limits were $1,500 per individual and $2,250 per couple. Asset limits were last revised over twenty years ago to $2,000 per individual and $3,000 per couple as specified in the law’s schedule of increases. That means that since 1989 no adjustments have been made for inflation or cost of living. If the 1974 limits had been even moderately adjusted for inflation, the 2010 limits would be $6,592 and $9,889 respectively.” Karen Harris & Hannah Weinberger-Divack, Accessible Assets: Bringing Together the Disability and Asset-Building Communities, 44 Clearinghouse Rev.: J. Poverty L. & Policy Clearinghouse 4 (May/June 2010).

17 Georgia Burke et al., Medicaid and Supplemental Security Income Eligibility: Time for a Tune-Up, 12 NAELA J. 1, 6 (2016).

18 ABLE Act of 2014, Pub. L. No. 113-295, div. B, tit. I, § 101, 128 Stat. 4056 (2014).

19 26 U.S.C. § 529A; Social Security Program Operations Manual System (POMS) SI 01130.740(A); H.R. 647, 113th Cong. (Dec. 2014); Ltr. From Brian Neale, Dir., Ctrs. for Medicare & Medicaid Servs., Ctr. for Medicaid & CHIP Servs., to St. Medicaid Dirs., SMD 17-002, RE: Implications of the ABLE Act for State Medicaid Programs, https://www.medicaid.gov/federal-policy-guidance/downloads/smd17002.pdf (Sept. 7, 2017) [hereinafter Neale Ltr. to St. Medicaid Dirs.].

20 Id.

21 See ABLE Alliance for Fin. Empowerment, ABLE Accounts Continue to Grow in Popularity, https://www.able-alliance.org/single-post/2018/02/16/ABLE-Accounts-Continue-to-Grow-in-Popularity (Feb. 16, 2018).

22 John M. Ariale, Realizing the Full Value of ABLE: A Legislative Update & the ABLE Alliance for Financial Empowerment (AAFE) 3 (Cloakroom Advisors 2016).

23 Congress.gov, H.R. 647 – ABLE Act of 2014, 113th Congress (2013–2014), Co-Sponsors, https://www.congress.gov/bill/113th-congress/house-bill/647/cosponsors (accessed May 21, 2018).

24 Congress.gov, S. 313 – ABLE Act of 2013, 113th Congress (2013–2014), Co-Sponsors, https://www.congress.gov/bill/113th-congress/senate-bill/313/cosponsors (accessed May 21, 2018).

25 Congress.gov, H.R. 647 – ABLE Act of 2014, 113th Congress (2013–2014), All Actions, https://www.congress.gov/bill/113th-congress/house-bill/647/all-actions?overview=closed&q=%7B%22roll-call-vote%22%3A%22all%22%7D (accessed May 21, 2018).

26 GovTrack, H.R. 5771 (113th): Tax Increase Prevention Act of 2014, https://www.govtrack.us/congress/votes/113-2014/s364 (accessed May 21, 2018).

27 Pub. L. No. 115-97.

28 Id. at § 11025.

29 Id. at § 11024(a).

30 Id. at § 11024(b).

31 26 U.S.C. at § 529A(b)(1)(B); 26 C.F.R. § 1.529A-1(b)(4).

32 26 U.S.C. at § 529A. See proposed regulations, 26 C.F.R. § 1.529A-2(e)(2), noting that the phrase “marked and severe limitations” means the standard of disability for children under 18 claiming SSI benefits based on disability.

33 20 C.F.R. at § 426.906.

34 26 U.S.C. at § 529A(e)(1).

35 26 C.F.R. at § 1.529A-2(e). See also IRS, New IRS Guidance to Simplify ABLE Program Administration, https://www.irs.gov/newsroom/new-irs-guidance-to-simplify-able-program-administration (Nov. 20, 2015).

36 For example, see Ohio’s ABLE program at Josh Mandel, Treas. of Ohio, STABLE Account, https://www.stableaccount.com (accessed June 13, 2018).

37 26 C.F.R. at § 1.529A-1(b)(4).

38 Id.; 26 U.S.C. at § 529A(e)(3).

39 26 U.S.C. at § 529A(b)(1)(B).

40 Id. at § 529A(c)(4).

41 26 C.F.R. at § 1.529A-2(c)(2)(ii).

42 26 U.S.C. at § 529A(b)(2)(A); 26 C.F.R. at § 1.529A-2(g)(1).

43 26 C.F.R. at § 1.529A-1(b)(17).

44 26 U.S.C. at § 529A(b)(1)(A); 26 C.F.R. at § 1.529A-2(a)(4).

45 26 U.S.C. at § 7701(a)(1) (defines “person” to include an individual, trust, estate, partnership, or corporation); POMS SI 01330.740.B.2; Neale Ltr. to St. Medicaid Dirs., supra n. 19, at 4 n. 1.

46 POMS SI 01130.740(B)(2).

47 26 C.F.R. at §§ 1.529A-3(b)(2), 1.529A-4(a)(1).

48 To determine whether a state provides an income tax deduction and if so, how much, see ABLE Natl. Resource Ctr., Shop the States to Choose the Best ABLE Program for You! http://www.ablenrc.org/state_compare(accessed June 7, 2018).

49 Id.

50 Id.

51 26 U.S.C. at § 529A(b)(2)(B); 26 C.F.R. at § 1.529A-2(g)(2).

52 Pub. L. No. 114-113 (H.R. 2029) (2015); POMS SI 01130.740(A).

53 ABLE Natl. Resource Ctr., What We’re About, http://www.ablenrc.org, scroll down to Which state has the best program for you? (accessed June 7, 2018).

54 128 Stat. at § 103(a).

55 POMS SI 01130.740(C)(3).

56 POMS SI 01130.740(D)(1)(a).

57 128 Stat. at § 103(b)(2); POMS SI 01130.740(D)(1)(a).

58 Id.

59 26 C.F.R. at § 1.529A-2(g)(3).

60 For a list of all states’ 529 plan limits, see Savingforcollege.com, Compare by Features, http://www.savingforcollege.com/compare_529_plans/?plan_question_ids[]=308&page=compare_plan_questions (accessed June 1, 2018).

61 26 U.S.C. at § 529A(f).

62 Id.

63 26 C.F.R. at §§ 1.529A-2(p), 1.529A-3(b)(4).

64 Pennsylvania and California have already passed laws. See Pennsylvania Achieving a Better Life Experience Act, Act 17, § 503 (2016), and Cal. Welf. & Inst. Code § 4885(b) (2018). Oregon and Illinois have also indicated that they will be passing similar laws.

65 26 U.S.C. at § 529A(a).

66 Id. at § 529A(c)(1)(B); 26 C.F.R. at § 1.529A-3(a).

67 26 U.S.C. at § 529A(e)(5).

68 Id.

69 26 C.F.R. at § 1.529A-2(h)(1).

70 Id. at §§ 1.529A-3(a), (d)(1); 26 U.S.C. at § 529A(c)(3)(A).

71 26 C.F.R. at § 1.529A-3(d)(2)(i).

72 Id. at § 1.529A-3(d)(2)(ii).

73 A review of each state’s investment options appear at ABLE Natl. Resource Ctr., supra n. 48.

74 26 U.S.C. at § 529A(b)(4).

75 Id. at § 529A(d).

76 Draper v. Colvin, 779 F.3d 556, 559–563 (8th Cir. 2015).

77 The POMS is located at Soc. Sec. Administration, POMS Home, https://secure.ssa.gov/apps10/poms.nsf/Home?readform (accessed June 1, 2018).

78 POMS SI 01130.740(B)(2).

79 POMS SI 01130.740(C)(4).

80 The POMS states that qualified disability expenses (QDEs) are expenses related to the blindness or disability of the designated beneficiary that are paid for the benefit of the designated beneficiary. In general, QDEs include expenses for education, housing, transportation, employment training and support, assistive technology and related services, personal support services, health, prevention and wellness, financial management and administrative services, legal fees, ABLE account oversight and monitoring, funeral and burial, and basic living. POMS SI 01130.740(B)(8).

81 The monthly SSI payment is computed by reducing the federal benefit rate (FBR) plus any state supplemental payment (SSP) by the amount of countable income and any deductions due to a prior overpayment.

82 20 C.F.R. at §§ 416.1104, 416.1110–416.1112 (earned income).

83 Id. at §§ 416.1120–416.1124 (unearned income).

84 Id. at § 416.1124(c)(12); POMS SI 00810.
420, 01120.200(E)(1)(a).

85 POMS SI 01130.740(B)(4).

86 Housing expenses for purposes of an ABLE account are similar to household expenses for in-kind support and maintenance (ISM) purposes, with the exception of food. Housing expenses include mortgage expenses (including property insurance required by the mortgage holder) and expenses for real property taxes, rent, heating fuel, gas, electricity, water, sewer, and garbage removal. POMS SI 01130.740(B)(9).

87 ISM consists of food and shelter provided directly to the recipient or paid for by a third party. 20 C.F.R. at § 416.1102. ISM reduces an SSI recipient’s SSI benefits, but not dollar for dollar as does unearned cash. Instead, depending on the recipient’s living arrangements, the maximum reduction is subject to either (1) the one-third reduction rule (also referred to as the value of the one-third reduction (VTR)) if the SSI recipient is living in the household of a person who provides both food and shelter or (2) the presumed maximum value (PMV) rule in all other situations in which the SSI beneficiary is receiving countable ISM. 20 C.F.R. at § 416.1130(c); see generally 20 C.F.R. at §§ 416.1130–416.1148. VTR is defined as one-third of the FBR. 20 C.F.R. at § 416.1131(a). PMV is defined as one-third of the FBR plus the general income exclusion of $20. 20 C.F.R. at § 416.1140(a)(1).

88 POMS SI 01120.200(E)(1)(b).

89 20 C.F.R. at § 416.1140.

90 This amount is calculated by taking one-third of the 2018 FBR of $750 ($250) and adding $20. 20 C.F.R. at § 416.1140(a)(1).

91 POMS SI 01130.740(C)(5).

92 POMS SI 01130.740(D)(2).

93 Id.

94 POMS SI 01130.700(B)(1).

95 POMS SI 01130.740(D)(2).

96 26 U.S.C. at § 529A(c)(3)(A); 26 C.F.R. at § 1.529A-3(a), (d)(1).

97 POMS SI 01130.740(D)(3)(c).

98 Neale Ltr. to St. Medicaid Dirs., supra n. 19.

99 Id. at 5–6.

100 Id. at 4.

101 See Ltr. From Lizbeth Silbermann, Dir., Program Dev. Div., Supp. Nutrition Assistance Program, to all SNAP Regl. Dirs., Treatment of ABLE Accounts in Determining SNAP Eligibility, https://www.fns.usda.gov/snap/treatment-able-accounts-determining-snap-eligibility (Aug. 4, 2016).

102 7 C.F.R. 273.8(e)(2)(ii).

103 42 U.S.C. at § 1396p(d)(4).

104 The safe-harbor trust exceptions in 42 U.S.C. § 1396p(d)(4) apply to Medicaid eligibility rules. The federal special needs trust (SNT) statutory exception was the first congressional policy permitting SNTs and continuing eligibility for Medicaid for persons with disabilities. Before then, there was much litigation involving common law SNTs between applicants and the states. Many states opposed such trusts on policy grounds.

105 42 U.S.C. at § 1396p(d)(4)(A).

106 Id. at § 1396p(d)(4)(B).

107 Id. at § 1396p(d)(4)(C).

108 Id. at § 1382b(e)(5) (SSI financial eligibility is preserved if assets are held in a qualifying trust). 42 U.S.C. § 1382b(e)(5) refers to the Medicaid safe harbor trust rules in 42 U.S.C. § 1396p(d)(4).

109 For Medicaid, a third-party SNT established on or after August 11, 1993, is not affected by the OBRA 93 trust rules. See 42 U.S.C. at § 1396p(d)(2)(A). For SSI purposes, the regulations allow third-party SNTs. See 42 U.S.C. at § 1382b(e)(3)(A); 20 C.F.R. at § 416.1201(a)(1). Some people use the phrase “supplemental needs trust” to distinguish a third-party SNT from a first-party SNT.

110 ABLE Natl. Resource Ctr., What Are ABLE Accounts?http://www.ablenrc.org/about/what-are-able-accounts (accessed June 7, 2018).

About the Author

Nancy Susan “Susie” Germany is an attorney with The Germany Law Firm, PC, Denver, Colorado,
and a Deputy Public Administrator for the 17th Judicial District. Her practice focuses in the areas
of special needs planning, elder law, guardianships and conservatorships, trust and estate
planning, fiduciary representation, and probate and trust administration. Ms. Germany is a
member of the Alaska Bar Association and the Colorado Bar Association, and is a past co-chair of
the Elder Law Section of the Colorado Bar Association. She is also a director for Front Range
Hospice and former president and director for the Colorado Fund for People With Disabilities. She
serves on the board of Cultivate, an organization providing yardwork and grocery delivery to low
income seniors in Boulder County. Ms. Germany often teaches continuing legal education courses
and gives presentations on special needs planning, elder law, financial exploitation, and probate

issues.

When Are IRA Distributions Not Included in a Spouse’s Gross Income?

September 10, 2018

Private letter ruling deems rollover made by decedent’s wife to be valid.

Susan R. Lipp | Aug 07, 2018

In Private Letter Ruling 201831004 (released Aug. 3, 2018), the Internal Revenue Service ruled that a decedent’s individual retirement account wasn’t an inherited IRA and that his surviving spouse would be treated as the payee of the IRA proceeds because she made a valid rollover of the assets; thus, she didn’t have to include those assets in her gross income.

Survivor’s Trust

A husband and wife established a revocable trust consisting entirely of their community property. When the husband died, the wife became the sole trustee of the trust. Also, the husband had an IRA, which listed the trust as the beneficiary. As per the terms of the trust, all of its assets, including the IRA, were allocated to a subtrust, the Survivor’s Trust. The Survivor’s Trust provided that the wife would receive the right to income for her life and as much principal as was needed for her health, support, maintenance, comfort and happiness. She also had the power to distribute any of the trust’s property, including to herself. Through that power, she distributed and transferred the IRA assets to a non-IRA account of the Survivor’s Trust. Within 60 days, those amounts were distributed from the non-IRA account held by the Survivor’s Trust and paid to a rollover IRA, established in the wife’s name.

Rulings Requested

The wife asked the IRS to rule that:

  • She be treated as the payee or distributee of her husband’s IRA.
  • Her husband’s IRA isn’t an inherited IRA for purposes of Internal Revenue Code Section 408(d)(3)(C ) with respect to her.
  • Her rollover of IRA assets was valid under the same section.
  • She won’t be required to include in her gross income for federal income tax purposes in Year 1 or Year 2 the amount distributed from her husband’s IRA and rolled over.

The IRS granted all of the wife’s requests.

Rationale

Under IRC Section 408(d)(1), an amount distributed from an IRA is included in the payee’s gross income. But, there’s an exception for a rollover contribution that satisfies the following requirements: (1) the entire amount received (including money and any other property) is paid into an IRA for the benefit of the individual for whom the IRA is maintained) not later than the 60th day after the day on which the individual receives the payment or distribution; or (2) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of the individual no later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount that may be paid into such plan may not exceed the portion of the amount received that’s includible in gross income (without regard to Section 408(d)(3)).

Note, the above exception doesn’t apply to an inherited IRA where the inheritor wasn’t the surviving spouse of the decedent.

In the present case, the wife, as the sole beneficiary of the Survivor’s Trust, was entitled to receive all of its income and principal to which the IRA was allocated. This is because the wife had the right to, and did, in fact, direct the trustee in writing to pay her any such amounts from the Survivor’s Trust, which included directing the assets from the IRA to first be distributed from the IRA and then, within 60 days, rolled over to the rollover IRA (notwithstanding the fact that the assets were held in a non-IRA account before being paid to the rollover IRA). Accordingly, for purposes of applying Section 408(d)(3)(A) to the IRA, the wife is effectively the individual for whose benefit the IRA is maintained. As such, she was entitled to roll over such amounts.

ALJ Says State Cannot Impose Penalty Period on Distributions from Trust

May 1, 2018

Source: ELA news

An administrative law judge in New Jersey concludes that the state cannot impose a penalty period based on distributions made from a trust when the trust was created before the five-year look-back period. A.M. v. Division of Medical Assistance and Health Services (N.J. Office of Administrative Law, No. HMA 9252-17, March 2, 2018).

In 2005, A.M. created an irrevocable trust that named her four children as beneficiaries and transferred a remainder interest in her property into the trust while retaining a life estate. In 2010, she transferred the life estate into the trust. In 2013 and 2014, the trustees made distributions to the beneficiaries and then terminated the trust. Continue reading