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The ABLE Act and Bridging the Great Divide: A Request to Revise the ABLE Act

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Please view the information on the New ABLE Act on Achieving Independence – http://achievingindependence.com/able/ revised December 9th 2014.

The ABLE Act and Bridging the Great Divide:

A Request to Revise the ABLE Act

By Stephen W. Dale, Esq.

This article is taken from an alert shared with a variety of disability organizations by Stephen W. Dale, Esq., LL.M., Pacheco, California and is reprinted here with permission.

 

For the last four years I have been monitoring this legislation which is now being called the ABLE Act. On the surface this is a feel good piece of legislation, but the more I explore it, the less I like it. I am very concerned that The Arc and other organizations are putting their prestige and political capital in what I consider a flawed piece of legislation that actually does a disservice to the disability community. I believe that one outcome, should this Act pass, is that The Arc and the other organizations promoting ABLE are going to open themselves to the criticism of having failed to consider, or failed to make clear to their supporters, what the actual impacts of the ABLE legislation will mean for people with disabilities and their families. I believe that it is in our community’s best interest to reach out to the legal community and partner rather than provide our community with options that appear simple but in fact create more problems that they resolve.

I believe that after careful review and with the proper advisement (especially of the tax issues) you will see the same danger I see. I will do my best to articulate my concern, and to make some suggestions about the path that I would like to see The Arc of California take, as well as The Arc National.

The Dilemma

So here is my dilemma; Am I a better soldier if I keep my mouth shut and not take an unpopular position or would a good soldier warn that our well-meaning generals could harm The Arc’s outreach and reputation? I have chosen not to be silent on this matter and have reached out to ask The Arc leadership to further study this bill and hopefully commit to amending or redrafting it. If ABLE is passed, I will solicit The Arc to wage a far reaching educational campaign to make sure that their families understand that this “simple” account has many hazards, not the least of which is the fact that when an ABLE beneficiary dies or is no longer disabled, the state will now have a legal right to be repaid for any Medi-Cal (Medicaid) used for medical purposes from the point that the ABLE Account was established.

To be fair, there are good things about ABLE. For instance, a disabled, but mentally competent person would be able to put some of his/her own (i.e., first party) money into their trust, as long as it is under $100,000, without losing eligibility for SSI or Medicaid. An ABLE account would allow that competent person to maintain control of his or her money and maintain his or her benefits for money rather than be subject to a payback if it went into a first party SNT.  Able would additionally allow that person to avoid having to utilize a ridiculous spending spree to get back on benefits.

 

The Specifics

In the examples below, I am referring to a PowerPoint presentation provided by The Arc during a call soliciting support of the ABLE Act, I have selected some specific portions of the materials to ease review:

Slide 4 states:

Some families have been seeking a way to save: 

  • Similar to Section 529 education savings plans for their college-bound children 
  • That is easier to establish and less costly than typical special needs trusts 
  • That will allow their adult children with disabilities to manage their own (or some of their own) funds

ABLE Does Not Create Parity with Current 529 Plans

The ABLE Act purports to create an easy way to save without the need for a costly special needs trust. It also allows persons with disabilities to manage their own funds. ABLE claims to give families with disabled loved ones parity with other families. ABLE tries to address the problem that under current circumstances it is very difficult to qualify for the annual $13,000 gift exclusion that the typical family can easily accrue in any given year. As I will explain later in greater detail, the gift tax benefit is a great goal, but addressing this would only benefit the 1 percent  and at a price. ABLE only gives the perception of parity. To create true parity, existing 529 education plans would need to be amended to require that a child who dies or is no longer a member of the class of persons to be benefited, then the state is to be paid back for any education spent on that child.

Slide 8

  • Creates a new subsection (f) ABLE Account within Section 529 of the Internal Revenue Code
  • Establishes additional qualified disability-related expenses 
  • Protects eligibility for federal benefit programs, such as SSI and Medicaid. 

Slide 8 tells us that ABLE would be part of the Section 529 tax code. Much like a typical 529 plan for education, the funds can only be used for specific disability-related expenses. I would suggest that readers review these expenses, which are common things that the giver would want the funds used for. Within the limits of the ABLE Act, funds can be set aside by the giver without interfering with SSI or Medi-Cal eligibility. So far so good.

Slide 10 – Taxation of the ABLE Account

  • Easy to open and available in any state
  • Same annual contributions apply (after $13,000 gift tax rules apply)
  • Same tax-free treatment of account applies. (Income earned grows tax-free, withdrawals for qualified disability expenses are tax-free.)
  • Same reporting requirements as traditional 529 apply 

Gift Tax Gift for the 1 Percent

Slide 10 reviews one of the major focuses of the ABLE Act, which is seeking parity with a 529 plan for income, estate, and gift tax purposes. For instance, I have a 529 plan for each of my grandchildren. My contributions qualify for the $13,000 annual exclusion for gift tax purposes. As great as this might sound, in my case the gift tax benefits of a 529 plan means little. Here is why:

If I were currently single, I could pass $5,000,000 to my heirs with no estate taxes.i  As a married couple, my wife and I can pass $10,000,000 to heirs during our lifetime or upon death. I don’t want to disappoint anyone, but as a disability rights attorney my estate is nowhere near these numbers.  I am not the only one.  I look at the estates of hundreds of clients a year and less than 5 percent of my clients will have a potential gift or estate tax issue, and I have an LL.M in Taxation and specialize in large estates. Many of the special needs trust lawyers I know never see a potentially taxable estate. The gift tax is a boogie man for most of us.

Think of the estate and gift tax exclusion as a lifetime coupon, what we call a “unified credit.” You can use your coupon while you are alive or use it when you die.  In either case you need to use it or lose it. For example, under current law each American taxpayer has a $5,000,000 tax free estate and gift tax coupon. If you wish, you can pass your entire $5,000,000 to anyone you like, including your child’s special needs trust, without paying one cent of tax. For instance, if you were to give $1,000,000 to your child’s properly drafted special needs trust, you will still have $4,000,000 to use during your lifetime or upon your death. For most of us this isn’t an issue. Therefore, there are no meaningful limits to the average family other than the common sense question of “how much I can put in a loved-one’s special needs trust?” Gift and estate taxes are not the focus of most people’s estate plan. I wish it was.

There is an exception to the lifetime gift and estate tax rules. I like to call it an annual coupon. Along with the exclusion we just described, each individual also has an annual gift tax exclusion of $13,000 per person.  This is a separate coupon that allows each of us to give up to $13,000 a year to as many people as we like as long as it is a “completed gift”. Quite literally, you could completely avoid estate taxes if you are wealthy by walking down the street giving everyone you meet a check for $13,000. In fact, if you are married, you could give everyone $26,000 a year.

The problem with a special needs trust is that, by its nature, gifts to the trust are not considered a completed gift. But here is the reality of the situation. Let’s say you were to make a gift into your child’s special needs trust for estate tax purposes. Remember, the trust must be properly drafted so that it addresses current and established guidelines.  Because the trust is not a completed gift, you can’t use your annual $13,000 coupon.  Rather, you will need to use part of your $5,000,000 lifetime exclusion. Therefore, if you use $100,000 of your $5,000,000 lifetime coupon, you can now only pass $4,900,000 in assets either during your lifetime or upon your death free from estate tax. If you are married, under current law you can only pass $9,900,000 gift or gift tax or estate tax free. As I pointed out earlier, this truly only affects the 1percent – not the vast majority of our community

A Word About Income Taxes

Let me mention an item not covered in these slides but one I have heard discussed in other presentations.  Advocates behind this legislation suggest that this would avoid a 35 percent tax that special needs trusts could be subject to. I have been querying trustees of special needs trusts to find a single instance where a special needs trust has paid a 35percent tax and have yet to find one.

So What Are They Talking About?

Prior to 1986 tax attorneys would create irrevocable trust after irrevocable trust because these trusts had a favored tax rate. Congress changed the laws over two decades ago, creating what is called a compressed tax rate. Today, if an irrevocable estate planning special needs trust realizes more than $11,350 without making any distributions then the trust is subject to a 35 percent tax.  In contrast, most taxpayers need more than $379,150 of taxable income to reach the 35% rate.77

In reality, no well-advised person pays that tax rate. There are all sorts of very competitive investments that focus on growth that are not subject to the compressed tax rate. I would defy any investor to use a 529 plan to out invest a skilled investment advisor. If that weren’t enough, under current law an estate planning special needs trust, often referred to as third party special needs trust, if drafted as a qualified disability trust, has a full $3,800 exemption.  All distributions for the benefit of the beneficiary are only taxed to the beneficiary, not the Trust. The beneficiary has an exemption of $3,800, and a standard deduction of $5,950, so there would not be any income tax on the beneficiary’s 1040 unless the taxable distributions are more than $9,750.  There is no tax on the Trust’s 1041 unless the non-distributed income, after deductions, exceeds $3,800.  This means that there is not much of a tax benefit for using an ABLE Account. Therefore with the proper utilization of a third party special needs trust, it’s possible in 2012 to shelter $13,550.  An ABLE Account with a $100,000 would need to earn 13.55 percent for any tax benefit to be competitive.

Slide 18 – The Payback

In the event the qualified beneficiary dies (or ceases to be an individual with a disability) with remaining assets in an ABLE account:

  • The assets in the ABLE Account are distributed to any State Medicaid plan up to the value of medical assistance provided to the beneficiary.
  • The amount of any such Medicaid payback is calculated based on amounts paid by Medicaid after the creation of the ABLE Account.
  • The state Medicaid plan is a creditor, not a beneficiary.

This issue is one of my biggest concerns regarding how the ABLE Act has been promoted. This was a necessary requirement in order to have a chance at obtaining a good legislative score.  Apparently it is not possible to have this passed without the payback. I have been monitoring all communications from The Arc and the National Association for Down Syndrome (NADS). I have not seen a single appeal to support the ABLE Act that even mentions the payback. Note:  I am keeping copies of all communications that Google comes across regarding the ABLE Act and with the exception of a single communication from the Fragile X Foundation, the payback is never mentioned. Email me at steve@dalelawfirm.com and I will gladly send you a copy of all communications for your review.

The Importance of Fully Educating Our Community About All Aspects of ABLE

So what’s the big deal? Let me illustrate. I recently gave a presentation to a group of families with children with Down Syndrome. I did my normal pitch – support The Arc, NADS, and California Disability Community Action Network run by Marty Omoto. One parent proudly announced that he had written his congressman to support the ABLE Act. I asked him if he realized that if his child passed away, not only would he have to deal with the unimaginable loss of his child, his ABLE account may be taken depending on how much medical care his child had received from the time the account was established based on any medical care paid by Medi-Cal. He answered that he was never made aware of the payback. The group was very angry and it took me a bit to get back on track. I have heard from three other attorneys that they have had exactly the same experience.

I have a niece with Down Syndrome and as we are all aware, persons with DS can be medically compromised.  Sadly it is not uncommon that persons with DS have a shortened lifespan. An estate planning special needs trust is not subject to this payback.

Bridging the Great Divide Between the Advocacy Community, the Legal Community, and the Trust

I have great respect for Marty Omoto from the California Disability Community Action Network in California who made an observation several years back that I believe is right on. If we continue to do the same advocacy to the same group of stakeholders the same way and expect a change of direction in cuts to services, who are we kidding? We need to expand our outreach. I live much of my life divided between the disability community and the legal and financial professionals serving persons with disabilities and their families. What I see is a great disconnect between those two entities. Members of the special needs trust community are stakeholders in our community. Working together can bring the special needs trust community more in line with the common objective of the ABLE sponsors of providing a better quality of life and true integration for our disabled citizens. Even more, with the right collaboration and by practicing inclusion of stakeholder instead of exclusion, The Arc and NADS could expand their outreach and better educate the community regarding the challenges that the disability community is facing and why we need to support community living and community programs.

Tip of the Hat, Wag of the Finger

One of the problems that I see with the ABLE Act process is a missed opportunity of meaningful partnership with the legal community. Essentially the legal and trust administration community was not at the table when the drafting of this act took place. I believe with inclusion of key members of the legal community, the ABLE Act could actually be drafted in a manner that actually will create true parity with a traditional 529 Plan, and maybe even better. I wish the problem was purely from the disability communities actions.  Unfortunately the problem is much deeper.

The special needs trust community, including attorneys, have a bad habit of not working closely with the disability community. I was recently speaking at a major national program for attorneys where advisors focused on special needs trusts for two solid days. The program covered all sorts of great information, in great detail but for me there was one thing missing. There was not a single presentation from a disability group. The Arc wasn’t there, nor was NADS or the National Alliance on Mental Illness (NAMI). They quite simply were not invited to the table.

There is something desperately wrong here and I would like all readers of this paper to commit to assisting all to bridge this divide between these two stakeholder groups. There is a growing industry of legal counsel and advisors committed to persons with disabilities and their families, and I strongly believe that these two worlds should reach out to one another.

So What Should We Do as Advocates?

I have a couple of wishes:

1.    Give full disclosure

Do not allow any further requests to support this legislation without mentioning the payback NOW – not after this legislation is passed. In fact, it would be more accurate to call the ABLE Account a Medicaid Payback Account, similar to a Medicaid Payback Trust. By more accurately naming the account in a manner where users cannot misinterpret this key element rather than as a saving plan, it will be easier for consumers to make informed decisions when choosing their options.

2.    Ask for a one-session delay to amend the ABLE Act

Urge The Arc and NADS to ask Sen. Ander Crenshaw (R-Fla.) to table this legislation until next session and allow a further analysis of how this act could truly create parity with the nondisabled community. The sentiment behind the ABLE Act is valid, but the ABLE Act as written, even though well intentioned, does not create parity, and in fact creates poor choices which damage our community. For NAELA members who have dedicated their practices to serving persons with disabilities and their families, we need to be ready to commit our resources to assist in amending the ABLE Act to provide good choices with clear consequences.

3.    Use this as an opportunity to expand The Arc’s outreach — help bridge the “great disconnect”

There are many legal and allied professionals that are stakeholders in the disability community that we could collaborate with to improve this legislation and possibly take this to a level that we could all be proud of. For example, I am on the Special Needs Trust Section Committee for the National Academy of Elder Law Attorneys (NAELA) as well as the Board of the Special Needs Alliance. Both of these organizations are willing and eager to collaborate with The Arc and NADS. In addition, I have identified a number of law professors that also can be called upon to provide advisement.

This is the perfect time to address the underlying issue — which is to have tools that persons with disabilities and their families can use to save for the future. It is my belief that ABLE, in its current form, is not the answer. I very much urge the reader to look beyond the rhetoric and make your decision concerning support based upon careful study.

Lastly, no matter the outcome of this legislation, the selfless work of the organizations sponsoring this legislation need and deserve the support of every American.  They are quite literally the lifeline to our citizens with disabilities and deserve no less than our respect and gratitude.

Stephen Dale is a disability rights advocate and attorney dedicated to providing quality estate planning. He is a frequent speaker on a variety of disability related topics across the country.  Mr. Dale regularly teaches courses to the public, financial professionals, and other attorneys on Special Needs Trusts and Trust Administration. 

i The current estate tax laws are due to sunset at the end of 2012. It is unclear what will happen in the future, but the worst-case scenario, which is incredibly unlikely, is that each citizen can pass $1,000,000 free from gift or estate taxes, or $2,000,000 per couple. The current proposal from the Obama Administration would allow $3,500,000 estate tax exclusion per person or $7,000,000 per couple, once again way out of the range of most of the families we serve.