Many parents worry about how their children are going to be able to afford college. Therefore, it has become relatively common for parents to fund 529 plans in order to save for their children’s college education.
Parents can receive a Wisconsin income tax deduction for their contributions to Wisconsin’s 529 plan, limited to $3,200 per year per child for 2018. In addition, any distributions from a 529 plan that are used for qualified education expenses can be taken out tax free.
Saving for a Child’s Future
Parents with a disabled child may also wish to save money for their child’s future expenses. While they are likely not concerned with funding their children’s college education, they do not want to disqualify their child from receiving government benefits.
Amy J. Krier, U.W. 2003, is an attorney with Certus Legal Group, Ltd. in Milwaukee, where she concentrates her practice on estate planning, trust and estate administration, and estate, gift, and fiduciary tax and compliance matters.
In the past, parents have generally relied on funding special needs trusts to save for the future expenses of their disabled child. However, creating a special needs trust can be costly, there is no state income tax deduction for contributions to a special needs trust, and distributions from a special needs trust are not tax-free.
Achieving a Better Life Experience – ABLE
Hence, ABLE (Achieving a Better Life Experience) accounts were born under the Stephen Beck, Jr. Achieving a Better Life Experience Act of 2014, also known as the ABLE Act, on Dec. 19, 2014, which was codified under Internal Revenue Code Section 529A.1
Wisconsin has also adopted the law and provided that although Wisconsin will not create its own ABLE account, Wisconsin residents may open an ABLE account in other states.2 In addition, Wisconsin residents may receive a state income tax deduction for contributions to an ABLE account opened in another state.3
Since ABLE accounts are fairly new, they are still evolving, and we could see additional legislation on them.
Currently, there are a number of requirements for ABLE accounts. First, an ABLE account may only be established for an “eligible individual.” In order to qualify as an “eligible individual,” he or she must have been blind or disabled prior to reaching age 26 and either:
1) be entitled to benefits for such blindness or disability under Title II or XVI of the Social Security Act, or
2) the individual or the parent or guardian of the individual must file a “disability certification” stating that the individual has a medically determinable physical or medical impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of at less 12 months or is blind, and includes a copy of the individual’s diagnosis relating to his or her impairment, signed by a physician meeting the criteria of Section 1861(r)(1) of the Social Security Act.4
The “eligible individual” is the account owner and is also referred to as the “designated beneficiary.” Each designated beneficiary may only have one ABLE account.5
Annual contributions to the ABLE account by all contributors during the taxable year are limited to the sum of:
1) the federal annual gift tax exclusion amount ($15,000 for 2018), plus
2) before Jan. 1, 2026, if the designated beneficiary is working and does not participate in an employer sponsored retirement plan, the lesser of the designated beneficiary’s compensation for the taxable year or an amount equal to the poverty line for a one-person household for the prior year ($12,060 for 2018).6
The designated beneficiary (or the person acting on his or her behalf) is responsible for maintaining records to ensure these requirements are met.7
Therefore, an employed disabled individual may contribute up to $27,060 to an ABLE account for 2018.
ABLE accounts do not affect a designated beneficiary’s qualification for government benefits so long as the account value does not exceed $100,000.
Distributions from an ABLE account to a designated beneficiary for “qualified disability expenses” are excluded from income, including any earnings on the account.
Qualified disability expenses are expenses related to the individual’s blindness or disability which are made for the designated beneficiary, including expenses for the following: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative expenses, legal fees, expenses for oversight and monitoring, and funeral and burial expenses.8
If distributions from an ABLE account are not used for qualified disability expenses, such distributions are taxable and subject to an additional ten percent tax.9
In addition, ABLE accounts are subject to a payback provision requiring any assets remaining in the ABLE account after the designated beneficiary’s death to be paid back to the government for benefits received.10
An ABLE account may be rolled over into another ABLE account for the same designated beneficiary or an eligible individual who is a member of the designated beneficiary’s family within 60 days of distribution, limited to one rollover every 12 months.11
Also, if a parent establishes a 529 plan for a child and later determines that the child has a disability that will likely prevent him or her from going to college, the Tax Cuts and Jobs Act signed into law Dec. 22, 2017, allows the 529 plan to be rolled over into an ABLE account for the child, subject to the maximum contribution amount.12 States are currently considering the state tax treatment of such rollovers.
Special Needs Trusts versus ABLE Accounts
In summary, parents of a disabled child should continue to consider a special needs trust to provide for their child’s future expenses, but may now also consider whether an ABLE account could be beneficial.
There are advantages and disadvantages to both tools. For instance, it may be cheaper to establish an ABLE account and distributions from the ABLE account for qualified disability expenses are tax-free.
However, unlike a third party special needs trust, contributions to an ABLE account are limited in amount, and ABLE accounts are subject to a payback provision upon the beneficiary’s death.
Therefore, it will depend on each family’s situation as to whether an ABLE account, special needs trust, or a combination of both may prove to be valuable.
1 Achieving a Better Life Experience Act of 2014, H.R. 647 – 113th Congress (2013-2014).
2 2015 Wisconsin Act 55 (July 12, 2015).
3 Wisconsin Assembly Bill 731 (2016), 2015 Wisconsin Act 312 (March 30, 2016).
4 26 U.S.C. §529A(e).
5 26 U.S.C. §529A(b)(1)(B).
6 26 U.S.C. §529A(b)(2) and (b)(7).
7 26 U.S.C. §529A(b)(2).
8 26 U.S.C. §529A(e)(5).
9 26 U.S.C. §529A (c)(3).
10 26 U.S.C. §529A (f).
11 26 U.S.C. §529A (c)(1)(C).
12 Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054 (2017).