1. THE ABLE ACT: ELIGIBILITY, REQUIREMENTS AND PLANNING POTENTIAL ANTHONY D. NICHOLSON May 11, 2016 Carolina Institute for Developmental Disabilities

2. ABLE Act - Background ABLE – “Achieving a Better Life Experience” Act Signed into law by President Obama on December 19, 2014. Amended Section 529 of the Internal Revenue Code. Anticipates the creation of individual state programs. North Carolina passed its ABLE account legislation on August 11, 2015.

3. Why ABLE Accounts? Offers a 529-like savings plan for individuals with disabilities. Responds to rising costs of living and health care. Combats self-impoverishment. Promotes independence and allows retention of needs-based public benefits like SSI and Medicaid. Alternative to expensive and complicated First Party Special Needs Trust.

4. Eligibility Must be eligible for benefits under SSI or SSDI, or File certification annually demonstrating Medically determinable physical or mental impairment which results in marked and severe functional limitations, which can be expected to result in death or which has lasted or can be expected to last not less than 12 months. Burden of categorization is on the owner; state not required to obtain physician diagnosis, but owner must have a physician certification on file and agree to provide it upon request.

5. Eligibility (continued) Must have become disabled before age 26. While determination of disability for purposes of SSI and SSDI allow an individual to become eligible for an ABLE account, it does not work the other way around. ABLE eligibility cannot be used to establish SSI or SSDI eligibility.

6. Establishing an ABLE account Fill out and sign application for NC or another state. Sponsored by state government or financial institution. Name designated beneficiary. A guardian, or agent under a power of attorney may establish, or a parent of a minor child. If contributor is not account owner, the account owner (individual with disability) or his or her guardian, trustee or agent must also sign the application.

7. Mechanics One account at a time. Investment can only be changed twice a year. Cannot be assigned, pledged, or used as security to obtain loan. Annual report must be sent to owner.

8. Contributions Must be in cash. May be made by any person (includes trusts, estate, partnerships, corporations). Limits: Subject to annual gift tax exclusion limit ($14,000 through 2016). Aggregate limit is same as 529 Plans ($410,000 for NC). Accounts that exceed $100,000 suspend SSI. Accounts in excess of aggregate limit will cause loss of Medicaid benefits. What if contributions exceed $14,000? Excess annual exclusions subject to return. 6% excise tax on contributions not timely returned.

9. Gift Tax Implications Completed gifts of present interest. Watch out for other gifts to same beneficiary in the same year (may trigger need to file gift tax return). Unlikely to be many gifts to ABLE Accounts.

10. Distributions For qualified disability expenses: 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 ABLE Account oversight and monitoring Funeral and burial expenses, and Other expenses (basic living expenses) approved pursuant to Treasury regulations.

11. Qualified Disability Expenses Proposed Regulations: Expenses that relate to the benefit of the designated beneficiary and help him or her maintain or improve his or her health, independence and quality of life. “…should be broadly construed to permit the inclusion of basic living expenses and should not be limited to expenses for which there is a medical necessity or which provide no benefits to others in addition to the eligible individual” E.g., paying for smart phone to assist in communication and navigation. Seems to be a departure from sole benefit rule, but unclear how much.

12. Income Tax Implications Contributions are not tax deductible. Income earned by account is not taxed (so long as distributions are for qualified disability expenses). If not a qualified disability expense: Income is subject to tax, AND 10% penalty incurred on the income.

13. What if Eligibility is Lost? ABLE account does not terminate. Remains available for use if beneficiary becomes disabled (eligible) again. However, No contributions would be accepted during period of ineligibility, and Any distributions would be subject to income tax + 10% penalty (because they would cease to be qualified disability expenses).

14. Post-death Disbursements Medicaid must be paid back– but only for Medicaid used after creation of the account In NC, State Treasurer is required to notify DSS upon death of beneficiary. DSS has 60 days to file claim against the ABLE account Notice of state’s right to file claim must be provided to beneficiary's personal representative following beneficiary’s death. Upon repayment, funds distributed per account agreement.

15. Rollovers and Transfers For same beneficiary: May be transferred to another ABLE account (i.e., to another state’s program). Contemplates rollover or program-to-program transfer with 60-day time limit (watch out for income in month of receipt with rollover). To a different beneficiary: Must be eligible (disabled) in the taxable year in which the change is made. Available only to siblings, step-siblings, and half-siblings (by blood or adoption). What about converting existing 529 accounts? IRS says no authority to make this a tax-free transfer, as this would not be for a qualified higher education expense.

16. Implementation North Carolina is supposed to have ABLE Accounts ready to be used in late 2016. Several states are close to having ABLE Accounts up and running including Ohio and Florida. Remember that you can set up an ABLE Account in ANY state, not just the state of your residence.

17. What does this mean for Special Needs Trusts? Not good for parents’ money – Not a substitute for a Third Party SNT Can be a good alternative to First Party SNT under limited circumstances.

18. ABLE Account Pros Easy to set up Low cost to maintain Payback limited to Medicaid used after creation Not a countable resource Tax-free distributions

19. ABLE Account Cons Disability must be diagnosed before age 26 Cash only $14,000 per year from any source $100,000+ = loss of SSI $410,000+ = loss of Medicaid Limited investment options Limited to qualified disability expenses Self-reporting requirements for income tax Medicaid Pay Back (as opposed to Third Party SNTs which have no Medicaid Pay Back)

20. First Party Special Needs Trust Pros No contribution limit No aggregate limit No disability age limit Can own any asset No investment restrictions

21. First Party Special Needs Trust Cons Increased cost of set up, maintenance Payback for all Medicaid used during beneficiary’s life

22. ABLE Accountsare best for: Receiving small settlements or inheritance when SNT is not warranted. Saving mechanism for beneficiary who accumulates excess income and resources (i.e. wages that accumulate over $2,000 at end of month).

23. First Party SNTs are best for: Any disability after age 26. Substantial inheritances and settlements. When flexible asset planning is called for. When maximum flexibility for distributions is desired. Still the best comprehensive special needs planning vehicle.

24. ANTHONY D. NICHOLSON McPherson, Rocamora, Nicholson & Nordgren, PLLC 3211 Shannon Road, Suite 620, Durham, NC anicholson@macroclaw.com www.macroclaw.com 919-493-0584