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A Tax-Favored Solution for Individuals With Disabilities

On December 19, 2014, President Obama signed the Achieving a Better Life Experience (ABLE) Act into law, allowing each state to establish a new type of tax-favored savings account, known as the Section 529-ABLE account, for individuals with disabilities. Like a “529” college savings account, these new accounts will allow friends and family members of qualified beneficiaries to contribute up to the annual gift tax exclusion amount ($14,000 for 2015), per year into an ABLE account, for a maximum of $100,000. The contributions will not be deductible for income tax purposes, but the funds will be eligible for tax-free accumulation when used for qualified expenses.

Qualified Beneficiary: the ABLE Act allows only one 529-ABLE account per qualified beneficiary. An individual may qualify in one of two ways:

1. The individual receives disability benefits under the Social Security Disability Insurance (SSDI) program or the Supplemental Security Income (SSI) program, and the individual became disabled before reaching the age of 26; or

2. The individual meets the SSI criteria regarding significant functional limitations, which is certified by a licensed physician and that the disability occurred before the individual reached the age of 26.

Qualified Expenses: distributions from 529-ABLE accounts are not subject to income tax to the beneficiary, so long as they are used for qualified expenses. A “qualified expense” is any expense related to the qualified beneficiary as a result of living a life with disabilities. These include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management, and administrative services. In addition, the same reporting requirements for traditional “529” college savings plans apply to 529-ABLE accounts. If managed properly, distributions from a 529-ABLE account will not jeopardize eligibility for critical federal benefits.

To the extent funds are not used for qualified expenses for the qualified beneficiary, the growth would be taxed as ordinary income, plus a 10% penalty on the taxable portion.

Upon the death of the qualified beneficiary, any amounts in that account (after Medicaid reimbursements) would be distributed to the deceased beneficiary’s estate or to a designated beneficiary, subject to income tax on the investment earnings but no penalty.

With a full understanding of account features and benefits, individuals and families can use 529-ABLE accounts as another tool in planning for the lifetime needs of an individual with disabilities. If you have any questions about 529-ABLE accounts, please feel free to contact any of the estate planning attorneys with the firm.

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