Date: January 30, 2013
The closing days of 2012 and opening days of 2013 were eventful days in our nation's capital. Most of us have heard in one form or another about the impending drop off the "fiscal cliff" and the Congressional action that broke the fall, at least for now.
While there was an enormous amount of national attention given to the Congressional impasse for the latter half of 2012, little if any, mainstream attention was given to a proposal that had bi-partisan support but was a casualty of the fiscal cliff. The Achieving a Better Life Experience Act (ABLE) purports to create a new savings vehicle for individuals with disabilities, and the proposal is expected to be revived and reintroduced in the new legislative session.
The first half of this edition of the Special Needs Estate Planner summarizes the provisions of the American Tax Relief Act of 2012 we felt would be of the most interest to our readers. The second half provides a brief summary of the ABLE Act proposal we expect you will hear more about in the coming months.
The American Tax Relief Act Of 2012 (Atra)
On January 2, 2013 the American Taxpayer Relief Act of 2012, became the law. In many respects the Act serves to permanently extend the Bush era income tax rates for the large majority of Americans. While the Act is quite broad in its scope, the following highlights provisions of the new law we believed to be of most interest.
Federal Estate and Gift Tax
After 4 years of uncertainty, ATRA has brought welcome permanency to the federal estate and gift tax structure. The amount a taxpayer may transfer without incurring estate, gift or generation skipping transfer taxes is $5,000,000, adjusted for inflation after 2011. With the inflation adjustment the 2013 estate and gift tax exemption is $5,250,000. Amounts in excess of the gift and estate tax exemption will be subject to graduated tax rates topping out at a 40% maximum tax rate. What this means for many of our readers is that the federal estate tax is no longer a credible threat to the amount of assets that they will be able to set aside for future generations.
In addition to the increased federal estate and gift tax exemption, if a spouse dies after 2011 without exhausting his or her estate and lifetime gift tax exclusion amount, the unused estate and gift tax exemption can be transferred to and used by the surviving spouse. This is concept is widely known as "portability". While this portability is now permanent at the federal level, it is not recognized for New York State estate tax purposes.
Finally, the 2013 annual gift tax exclusion was increased to $14,000.
Charitable IRA Distributions
Taxpayers age 70 ½ and older are able to exclude up to $100,000 of income from distributions from individual retirement accounts when those distributions are made to qualified charities through December 31, 2013. This provision is an extension of provisions that were in place in 2010 and 2011. Since the extension passed after the end of the 2012 calendar year, taxpayers making such distributions after December 31, 2012 and before February 1, 2013 will be allowed to treat it as having happened on December 31, 2012.
Income Tax Rates
The top personal income tax bracket is increased to 39.6%, and applies to income in excess of $400,000 for individuals, and $450,000 for married couples. These thresholds are indexed for inflation. It is worth noting that the tax brackets are based upon taxable income (i.e. income after all deductions) and not Adjusted Gross Income (income before most meaningful deductions).
The remaining tax brackets are extended at their current levels.
Capital Gains Tax Rates
The Act makes permanent the current capital gains and qualified dividends rates of 0% for taxpayers in the 10% and 15% income tax brackets, and 15% for taxpayers in the 25%, 28%, 33% and 35% income tax brackets. For taxpayers in the new 39.6% tax bracket, qualified dividend and capital gains taxes will be raised to 20%.
Itemized Deductions & Personal Exemptions
The phaseout of itemized deductions and personal exemptions is again applicable for 2013 and subsequent years.
The phaseout for itemized deductions (also known as the "Pease limitation") reduces total itemized deductions by 3% of excess income over an Adjusted Gross Income of $300,000 for married couples, and $250,000 for individuals.
The personal exemptions phaseout (also known as the PEP), reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over an Adjusted Gross Income of $300,000 for married couples, and $250,000 for individuals.
The income thresholds are indexed for inflation in years after 2013.
Achieving a Better Life Experience (ABLE) Act: Good Intentions/Questionable Results
For the last four (4) years the ABLE act has been gaining widespread national support among legislators and disability organizations. For the second consecutive legislative session, the ABLE Act died in committee. The supporters of the ABLE Act, which grew in droves in 2012, describe it as a low-cost tool for families to save for future disability related expenses in a similar manner to College Savings Plans known widely as "529" plans. As you will see below, we believe the concept is good, but the execution falls far short of what is necessary to make this a credible planning tool for most of our clients.
Planning for clients who have children and other family members with special needs can be challenging. With the special needs family, the focus is often on issues such as guardianship, maintaining public benefits, and future access to community based support services, issues with which most tax and estate planning professionals have limited experience. Should the ABLE Act eventually become law, it will add another option for planners and family members to consider.
The ABLE Act would add a new provision to Section 529 whereby state "ABLE programs" and "ABLE accounts" would be treated in the same manner as qualified tuition programs.
Qualified Disability Expenses
Much like the Section 529 definition of qualified higher education expenses, the ABLE Act defines "qualified disability expenses" as "any expenses which are made for the benefit of the individual with the disability who is a designated beneficiary".
The proposed legislation goes on to itemize specific categories of expenses, namely, education, housing, transportation, employment support, health prevention and wellness, financial and legal expenses and assistive technology expenses.
Who is eligible for an ABLE Act Account?
Under the proposal, ABLE accounts can only be established and maintained for someone who is determined to be an "Individual with a Disability," a determination which must be made and/or certified on an annual basis.
While many individuals with disabilities receive Supplemental Security Income or Social Security Disability income benefits and would thus easily qualify for participation in an ABLE account, there has been concern that the ABLE Act definition will exclude many individuals whose disabilities are more difficult to identify and define. For example, recently a fairly significant change was made to the manner in which autism spectrum disorders are diagnosed and categorized. Many advocates believe that this redefinition will make it harder for individuals on the spectrum to meet the definition of "disabled" for the purposes of the Supplemental Security Income and Social Security Disability programs, notwithstanding the fact that their disability leaves them unable to work. The same concern exists for many individuals with mental illness, acquired head injuries, learning disabilities or other "high functioning" individuals with disabilities. When combined with the risk of being caught by the "Payback Provision" (explained below), we think the potential benefits of the ABLE provisions are significantly outweighed by the costs.
The Payback Provision
What is most frustrating about the commentary and dialogue surrounding the ABLE proposal is the fact that its proponents seem to leave out what is perhaps the most costly and potentially damaging result of using the ABLE account as an alternative to the traditional Third Party Supplemental Needs Trust; namely the payback provision.
When a beneficiary of an ABLE account dies, the Medicaid program must be repaid from funds in the account for all Medicaid benefits paid out on that beneficiary's behalf during his or her life. This is in stark contrast to what happens upon the beneficiary's death when a traditional Third Party Supplemental Needs Trust is used to hold family assets for a family member with a disability. With the Third Party Supplemental Needs Trust, funds remaining after the beneficiary's death will go wherever the parents (or other person establishing the trust) chooses - to other family members, to charity, etc.. By choosing an ABLE account over a traditional Third Party Supplemental Needs Trust, families are subjecting their assets to a voluntary repayment to the State, a payment that would not otherwise have to be made.
Explanation of this Payback Provision is suspiciously absent from much of the promotional materials circulated by various national disability organizations supporting the ABLE legislation. Whatever the motive for failing to publicize this confiscatory feature of the ABLE Act legislation, we believe that the omission represents a disservice to the disability community and presents a substantial financial risk of which families should be aware should the ABLE Act become law.
Should the ABLE Act be reintroduced (for the third time) during the 2013 legislative session, we expect it will be in substantially similar form to that introduced in 2011. The 2011 proposal garnered significant bi-partisan support from members and Congress and from disability organizations around the country. For now we are keeping our eyes on it and (should it pass) we expect to provide our readers with a comprehensive summary of the features of the Act, so that advocates and professionals can help educate families about both the benefits and the risks of using these accounts.
FIRM NOTES AND NEWS
We are pleased to announce that our firm continues to expand. In August, Maureen T. Provost, a seasoned Trust and Estate Administration paralegal with over 30 years of experience joined our practice. We knew Maureen well from our predecessor law practice, and are so very pleased that she is working with our practice again.
In December, Patricia ("Pat") Decker, a seasoned office administrator and legal assistant joined our practice. Pat is serving both to support our existing practice and our case management and advocacy division, a rapidly growing component of the firm.
Attorney Tara Anne Pleat was recently appointed an Adjunct Professor of Law at Albany Law School where she is teaching "Financial Planning for the Elderly," a course taught in the spring semester which is a comprehensive long term care and special needs estate planning course.
Attorney Ed Wilcenski was recently appointed as a member of the Board of Directors of the Shenendehowa Adult Community Center in Clifton Park, New York. The "ACC" provides recreational and educational opportunities to seniors and their families in the Southern Saratoga region.
This newsletter is not intended as a substitute for legal counsel. While every precaution has been taken to make this newsletter accurate, we assume no responsibility for errors or omissions, or for damages resulting from the use of the information in this newsletter. If you would like to be removed from our distribution list, please email us or call us at (518) 881-1621