Washington Hotline – October 6, 2020


Benefits of an ABLE Account

Millions of Americans have a disability and depend on public benefits for many of their basic needs. Individuals with disabilities may qualify for Supplemental Security Income (SSI), Medicaid and other benefits. Government benefits are generally available to individuals who have less than $2,000 in cash savings or retirement funds.

To enable these individuals to have additional resources to cover the substantial costs of living with a disability, the Achieving a Better Life Experience (ABLE) Act of 2014 was passed. The ABLE Act is designed to permit disabled individuals to acquire funds that will cover some of their expenses.

The legislation stated the ABLE account will “secure funding for disability–related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary’s employment and other sources.”

I. Who Qualifies for an ABLE Account?

ABLE account individuals must have a disability with an age of onset prior to age 26. They may also receive SSI or Social Security Disability Insurance (SSDI) payments. The SSI and SSDI recipients are deemed qualified for ABLE accounts. Even if individuals are not recipients of SSI or SSDI, they are eligible for an ABLE account if they receive a letter of disability certification from a physician. The individual may be over age 26 and still be eligible if the age of onset was before the 26th birthday.

II. How Large May the ABLE Account Gifts and Balance Be?

The total ABLE account contribution limit is currently $15,000 per year. This is the same as the IRS present interest exclusion for gifts to an individual. The total limit for ABLE accounts varies in different states. The state limits are $235,000 to $529,000.

If an ABLE account beneficiary is a recipient of SSI, there is also a separate limit. The SSI individual resource limit is $2,000. The ABLE account balance limit may not exceed $100,000 or the SSI cash payment is suspended. (The typical SSI payment is about $600 per month). While the SSI cash benefit may be suspended if resources exceed the $100,000 level, the individual is still eligible for Medicaid.

If the ABLE account owner is employed and there is no employer qualified retirement account, he or she may contribute additional amounts up to the lesser of earned compensation or the poverty line amount applicable in his or her state.

III. What are Qualified ABLE Account Expenses?

The qualified expenses include all amounts needed for the disabled person to live. These may include payments for education, food, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence and/or quality of life.

IV. Are There Other ABLE Account Rules?

The individual may have only one ABLE account. The account may be in a state other than the individual’s state of domicile or residence. Most states now accept ABLE accounts from out–of–state individuals.

The ABLE accounts are similar to 529 college savings plans in that states may offer different investment strategies. Depending upon the needs and goals of the individual, either a growth or income strategy may be appropriate.

V. How Does An Individual Set Up an ABLE Account?

Each state will have its own guidelines for creating an ABLE account. There is usually a minimum contribution and there may be a setup fee. The mutual fund investments fee should be disclosed. States may also have restrictions on the amounts and frequency of withdrawals.

Editor’s Note: An excellent resource for understanding the ABLE account is the ABLE National Resource Center. Individuals may access ABLE account information at ablenrc.org.

Final Regulations on ABLE Accounts

On October 1, 2020, Treasury published T.D. 9923 and issued the final regulations on ABLE Accounts.

The final regulations cover many specific aspects of ABLE Accounts. An account must be “maintained by a State, or its agency or instrumentality, if all the terms and conditions of the program are set by the state, or its agency or instrumentality, and the State, or its agency or instrumentality, is actively involved on an ongoing basis in the administration of the program.”

In order to provide flexibility, the state may contract with a private entity for various services. It is also permissible for two or more states to join together in a cooperative program that will reduce operational costs.

The initial law required the ABLE account beneficiary to reside in the state that created the account. However, this residence requirement was repealed. ABLE accounts may be established by an individual under any qualified state program.

The “designated beneficiary” is the individual who will receive benefits from the ABLE account. This person may have signatory powers, but it may be necessary for a parent, legal guardian or agent operating under a power of attorney to have this power. The final regulations create a hierarchy for signatory permissions. The “hierarchy consists of the individuals selected by the eligible individual or the eligible individual’s agent under a power of attorney, legal guardian or conservator, the spouse, parent, a sibling, a grandparent, or a representative payee (whether an individual or organization) appointed by the SSA, in that order.”

The permission for a signatory also enables an individual to have two or more persons who are co–signatories.

The ABLE account is limited to one per eligible beneficiary. Because an individual may establish an account in more than one state, it may be necessary to rescind or consolidate accounts. The final regulations permit limited rollovers and make provision for return of excess contributions.

The disability definition may include both a physical and a mental disability. The statute does not differentiate between a mental or physical condition, and the final regulations retain the language from Reg. 1.529A–2(e)(1)(i)(A) of the 2015 proposed regulations that provides that a mental impairment can meet the requirements for a disability certification.

If an individual is dependent upon the diagnosis of a physician to qualify for an ABLE account, there may be concern about the privacy of his or her medical records. The final regulations permit the individual or the legal guardian to file a statement under penalty of perjury that the signed diagnosis will be retained and provided to the IRS upon request.

It is possible that the condition of the individual may improve and he or she is no longer disabled for purposes of the ABLE account. If this occurs, the regulations indicate that there will be no additional contributions permitted to the account.

To facilitate contributions, gifts to the ABLE account may be made in cash or by credit card. The total amount of contributions per year may not exceed the Section 2503(b) gift tax annual exclusion amount. This is $15,000 in 2020 and may increase in future years.

Limits on the account balance are established by each particular state. If the state’s ABLE account limit is exceeded, contributions are not permitted. However, if the ABLE account balance declines and is below the aggregate state amount, contributions may be resumed.

In some circumstances, an individual may have multiple ABLE accounts or have made an “excess contribution” to the account. If there is an excess contribution, “a qualified ABLE program would be required to return that excess contribution or excess aggregate contribution, along with all net income attributable to the excess amount, to the person or persons who made the contribution.” The ABLE account balance may not be pledged for security on a loan.

The expenses for distributions are qualified if they include amounts for “education, housing, transportation, employment training and support, assistive technology and personal support services, health prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral expenses, and other expenses that may be identified from time to time in future guidance.”

It is possible to change the beneficiary of an ABLE account. During the lifetime of the designated beneficiary, a qualified successor designated beneficiary may be chosen.

Transfers from qualified programs are permitted. A “program–to–program transfer” is a direct transfer from one account of the beneficiary to an ABLE account of the same beneficiary or to another eligible individual who is a sibling of the beneficiary.

Grassley Supports Conservation Easement Bill

An updated version of the Charitable Conservation Easement Program Integrity Act (S. 4751) has been introduced by Senate Finance Committee Chairman Chuck Grassley (R–IA), Sen. Steve Daines (R–MT) and Senate Agriculture Committee Chairman Pat Roberts (R–KA).

Senator Grassley declared his support for the new bill. He noted, “Senator Wyden and I found in our recent report on syndicated conservation easement transactions that Congress should take further action to end these abusive schemes. This bill makes clear they are not allowed under our tax laws. The IRS shamed these scammers by publicly listing these transactions, but the continued growth in their numbers shows that shame alone won’t do the trick. The IRS and the Department of Justice will continue to do their job enforcing the law.”

Senator Daines continued, “This is about promoting conservation in Montana, saving taxpayers billions of dollars and stopping scam artists from abusing a critical conservation program used across the country.”

Senator Roberts concluded, “This legislation confronts the well–documented abuse of syndicated conservation easement transactions and, by extension, protects the true integrity of the program. These abusive transactions come at significant expense to American taxpayers and undermine the family farms and ranches that use conservation easements as a legitimate charitable tool.”

The Charitable Conservation Easement Program Integrity Act limits the charitable deduction generally to a multiple of 2.5 of a partner’s original investment. However, the updated bill creates new limits that are designed to minimize potential abuse.

Senator Daines published a specific description of the new provisions. The revised bill defines the partner’s basis to include the contribution, but excludes the partnership–level debt that otherwise might increase basis. It also limits the ability of an individual to use multiple partnership entities to make the contribution. The interest in a partnership must be held directly and not through other passthrough entities.

The disallowance of deduction rule applies to a period of three years after the holding period in the partnership. The three-year term commences on the later of the date the partnership acquired the real property or the investor contributed funds to acquire a partnership interest.

The bill generally applies to contributions after December 23, 2016. This was the date when the IRS published Notice 2017-10 and required a syndicated conservation easement partnership to be a reported transaction.

The updated bill was drafted in response to concerns by conservation organizations that the initial bill could be avoided through various methods. Lori Faeth is a representative of the Land Trust Alliance. She stated that the updated bill was an improvement. Faeth noted, “It closes those loopholes and continues to safeguard taxpayers and allow charitable conservation donations to continue unimpeded.”

However, Robert Ramsey of the Partnership for Conservation opposed the new bill. He stated it “continues to rely on punitive retroactivity, fails to safeguard access to market–based conservation incentives for all Americans, and disregards the vital role of partnership conservation in preserving critical habitats for future generations.”

Editor’s Note: Senator Grassley, Sen. Wyden and IRS Commissioner Chuck Rettig are unified in this campaign to protect the conservation easement charitable deduction. They believe the overvaluation of charitable conservation easement deductions places the entire deduction at risk. The IRS currently is litigating with approximately 80 conservation easement partnerships in Tax Court. It has offered stringent settlement terms to these partnerships.

Applicable Federal Rate of 0.4% for October — Rev. Rul. 2020-20; 2020-41 IRB 1 (16 September 2020)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2020. The AFR under Section 7520 for the month of October is 0.4%. The rates for September of 0.4% or August of 0.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

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