"ABLE" ACCOUNTS CAN BENEFIT LOVED ONES WITH SPECIAL NEEDS

For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. On the one hand, you want to provide the most comfortable life possible for your family member. On the other hand, you don’t want to jeopardize his or her eligibility for needed government benefits.

For many years, the most effective solution to this problem has been to set up a special needs trust (SNT). But beginning in 2014, the Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.

How ABLE accounts work

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

Comparison with SNTs

Here’s a quick review of a few of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Michigan's program is known as MiABLE. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

After you die. After you die, money in your ABLE account will be used to pay back the Medicaid program for any benefits you got after you opened your account. If that could be an issue for your family, look into a third-party Special Needs Trust. 

Contact us with additional questions you may have regarding ABLE accounts.

ARE YOU FAMILIAR WITH FRAUDULENT TRANSFER LAWS?

A primary goal of your estate plan is to transfer wealth to your family according to your wishes and at the lowest possible tax cost. However, if you have creditors, be aware of fraudulent transfer laws. In a nutshell, if your creditors challenge your gifts, trusts or other strategies as fraudulent transfers, they can quickly undo your estate plan.

Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). Michigan has recently adopted the Uniform Voidable Transactions Act (UVTA) which has supplanted the Michigan Uniform Fraudulent Transfer Act.

Under MCL 566.34 of the UVTA,

. . ., a transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following circumstances:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.

(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor did either of the following:

(i) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

(ii) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

Note the inclusion in the statute of the language that refers to a creditor's claim [that] arose before or after the transfer was made or the obligation was incurred.

Just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. Because a court can’t read your mind, it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer. The statute enumerates the factors to be considered as follows:

(2) In determining actual intent under subsection (1)(a) or (4), consideration may be given, among other factors, to whether 1 or more of the following occurred:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially all of the debtor's assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

Furthermore:

A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. MCL 566.35

“Insolvent” means that the sum of your debts is greater than the sum of the value of all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due other than as a result of a bona fide dispute.

Know your net worth

By definition, when you make a gift — either outright or in trust — you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer.

To avoid this risk, analyze your net worth before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency.

Fraudulent transfer laws vary from state to state, so consult an attorney about the law in your specific state.

LEAVING SPECIFIC ASSETS TO SPECIFIC HEIRS IS AN ESTATE PLANNING NOT ADVISABLE

 

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as a home, a car or stock — to specific people, you could end up inadvertently disinheriting someone.

Unintended consequences

Here’s an example that illustrates the problem: Kim has three children — Sarah, John and Matthew — and wishes to treat them equally in her estate plan. In her will, she leaves a $500,000 mutual fund to Sarah and her $500,000 home to John. She also names Matthew as beneficiary of a $500,000 life insurance policy.

By the time Kim dies, the mutual fund balance has grown to $750,000. In addition, she has sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. She didn’t revise or revoke her will. Although in Michigan there is a statute that might correct the situation, the possible result of this type of planning might be that Sarah receives the mutual fund, with a balance of $1.5 million, and John and Matthew are disinherited.

Safer alternatives

To avoid this outcome, it’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Kim, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to help ensure that outcome while avoiding undesirable consequences. For example, your trust might provide for your assets to be divided equally but also for your children to receive specific assets at fair market value as part of their shares.

Please contact us for additional details on planning strategies that can help ensure your assets are distributed as you wish without causing unintentional consequences