Many are familiar with section 529 college savings accounts, from which tax-free distributions must be used for qualified higher education expenses. The “Achieving a Better Life Experience Act of 2014” or the “ABLE Act of 2014” adds a similar account under IRC §529A that individuals who become severely disabled before age 26 may establish to use for “qualified disability expenses,” which can include education, housing, and transportation.
As with regular section 529 savings accounts, annual contributions to ABLE accounts can be made up to the gift tax annual exclusion ($14,000 in 2015), although this limitation is applied to all contributors on an aggregate basis, and there’s no parallel provision for making 5 years’ worth of annual exclusion gifts in a single year as provided in IRC §529(c)(2)(B).
Before ABLE accounts, some practitioners have used regular 529 accounts owned by special needs trusts (SNTs) to make indirect annual exclusion gifts for the benefit of persons with disabilities because the 10 percent penalty for nonqualified educational distributions doesn’t apply to individuals with disabilities (Prop Treas Reg §1.529–2(e)(4)(ii)(B)(1)–(2)) even though the distributions may be taxable.
Subject to the more restrictive contribution limits, the ABLE Act sweetens the deal by allowing tax-free treatment for the earnings portion of otherwise nonqualified distributions.
But practitioners may continue to advise making contributions to 529 savings accounts owned by SNTs instead of the new ABLE accounts to avoid possible treatment as resources of the designated beneficiary in determining eligibility for traditional Medi-Cal and other needs-based public benefits. It’s uncertain whether SNTs can own ABLE accounts.
The ABLE Act follows the odd treatment of 529 savings accounts that contributions are considered a completed gift of a present interest to the designated beneficiary despite the ability of the account owner to change the designated beneficiary without making a further gift. IRC §529A(c)(2). (The ABLE account owner is the eligible individual who established the account, unlike section 529 accounts established by another person.)
Get more on recent tax legislation affecting estate planners in the February issue of the Estate Planning & California Probate Reporter. For more on the anti-abuse rule for 529 savings accounts, check out CEB’s California Estate Planning §21A.23A. Learn about the strategy of making contributions to 529 savings accounts owned by SNTs in CEB’s Special Needs Trusts: Planning, Drafting, and Administration §§7.49–7.52.
Other CEBblog™ posts you may find useful:
- No Means No for Successor Trustee of Special Needs Trust With No-Compensation Clause
- Special Needs Trusts: Providing for People with Disabilities
- Dead Man “Kwoking”: Estate Planning Property Transfers Can Trigger Title Insurance Nightmares
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