Monday, December 22, 2014

ABLE Accounts - a New but Limited Financial Option for the Disabled

A new law should offer a path to additional financial security for some individuals with disabilities. The “Achieving a Better Life Experience” (ABLE) Act creates Section 529A of the Internal Revenue Code (26 U.S. Code §529A) which authorizes a new form of tax free savings account for individuals who became severely disabled before they reached age 26.
The idea is to allow a limited class of people with disabilities to have more savings than previously allowed without jeopardizing their public benefits eligibility. The extra savings in the account can be used as needed to pay for a broad range of expenses like education and housing costs.
ABLE accounts should be relatively easy and inexpensive to set up. Unlike creating a trust, you won’t need to involve a lawyer (although advance legal planning advice would be beneficial). If you follow all the rules there should be no income tax on the earnings of the ABLE account and you won’t have to file an annual income tax return.
This all sounds pretty good. Unfortunately, the law is subject to limitations that restrict its value for most of the disabled population. But it is an option that will be useful for some.


The ABLE Act allows qualified individuals to set up one special ABLE account that can be used to pay for a broad range of expenses. The account is established by and owned by the disabled individual but anyone can contribute to it. 
If the rules are followed, earnings on the ABLE account will not be subject to federal income tax, and more importantly, the funds in the account will not disqualify the owner from continued benefits under the Supplemental Security Income (SSI) and Medicaid programs. (If the account balance exceeds $100,000, SSI is suspended but Medicaid eligibility can continue.)   
To be “designated beneficiary” of an ABLE account you must have become disabled before age 26. If you meet this limitation there are two potential paths to ABLE qualification:
(1) If you are receiving SSI or Social Security Disability Insurance (SSDI), you are qualified under the ABLE Act.
(2) If you are not receiving benefits from SSI or SSDI, you can still qualify via a certification process based on a doctor’s diagnosis. You must be certified as having a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or as being blind.
The money in an ABLE account can be used for a wide range of "qualified disability expenses." Funds can be used to pay for education, housing, health, transportation, personal support, employment training, legal and financial assistance, and more.
The ABLE Act takes effect for tax years beginning in 2015 but you won’t be able to set up an account right away. Regulatory guidance must be issued and your state must establish a program before you can set up an account.


Because of the age limitation in the law, ABLE accounts will be of most interest to individuals with developmental disabilities, mental health issues and childhood conditions. Although the condition must have arisen before the account owner reached age 26, individuals over that age can create an account if they meet the age of onset requirement.  
But the age limitation means that few older adults will be eligible beneficiaries under the ABLE Act. And the program has a number of other requirements that make it less attractive for many of the individuals who do qualify. These include the following:  
Medicaid Payback Requirement.  After the death of the beneficiary funds remaining in an ABLE account must be used to repay any state Medicaid plan that was used by the beneficiary after the account was established.
Contribution limitations. ABLE accounts are modeled to some extent on qualified tuition plans (QTP or “529 plans”) that allow for tax free savings for higher education expenses. Some of the limitations are based on those found in QTP plans. Contributions to ABLE accounts will be limited to the annual exclusion amount (currently $14,000 per year per donor) and the accounts will have the same aggregate contribution limit as the state’s QTP plans. (In Pennsylvania the aggregate 529 plan contribution limit is currently $452,210). Contributions must be made in cash. Violation of these limits may disqualify the entire account.
$100,000 Limitation for SSI Qualification. The usual qualification resource limit for an individual for SSI is $2,000. But amounts in an ABLE account of up to $100,000 will be ignored for purposes of qualifying for SSI. Amounts (including earnings) in an ABLE account in excess of $100,000 will be considered to be a resource of the designated beneficiary and can cause their SSI benefits to be suspended until the balance is reduced. Note that the suspension of benefits applies to SSI but not to Medicaid.
One Account. A beneficiary can have only one ABLE account.
Residence. The beneficiary must reside in a state that has authorized ABLE. (My guess is that this will not be a problem in most states including Pennsylvania given the broad bi-partisan support in Congress for the ABLE Act.)
Qualified Expense Limitation. As noted above, the funds in an ABLE account can only be used for “qualified disability expenses.”  

Comparing ABLE Accounts to Special Needs Trusts

Even for those who meet its age of disability onset requirement, ABLE will be only one of several tools that can be used to set aside some savings. Other options will often be superior. In particular, various forms of “special needs trust” have long been used to provide additional financial security for disabled individuals without impacting their SSI and Medicaid benefits.
If the funding is coming from a parent (or other third party), using a third party special needs trust will have many advantages over funding an ABLE account. With a third party created trust there are no age limits, or limits on the amount you can put into the trust. Perhaps most notably, there is no Medicaid payback requirement.
The ABLE account does have some potential income, estate, and gift tax advantages over the third party trust, but in most cases these tax advantages will turn out to be illusory. Gift and estate tax concerns mainly apply only to those few donors who have assets in excess of a $5.43 million dollar (in 2015) exemption amount. Few parents are that wealthy. 
And, while the earnings on an ABLE account can be income tax free, the earnings of many third party special needs trusts also avoid federal income tax. These trusts are usually set up so that income is taxed to the disabled beneficiary. This means that the beneficiary’s $4,000 exemption and $6,300 standard deduction (in 2015) can shelter up to $10,300 from income tax. In addition, disabled beneficiaries of third party trusts usually have lots of tax deductible expenses that can protect additional income from tax. So, the federal income tax on the earnings of many special needs trusts ends up being zero.
Families should carefully consider the advantages and disadvantages of ABLE accounts vs. special needs trusts before deciding what to create and fund. (For a more in-depth discussion of the types of special needs trust and their use see my earlier blog post What are "Special Needs Trusts.")  

Who may benefit most from the ABLE planning option

Given the restrictions that apply to ABLE accounts and the existence of other planning tools (especially special needs trusts), it’s easy to become discouraged. It looked like Congress finally decided to do something to help the disabled “achieve a better life experience,” but when you dig down into the law you begin to question who will actually be helped.
Actually, even with all of its limitations, the ABLE account option may be of significant value to some disabled individuals. In particular, it may provide a much needed escape hatch for the employed disabled.
Currently, millions of individuals with disabilities are caught in a financial trap that affects their SSI and Medicaid benefits. The problem is that when they try to save some of their wages, it causes their savings to exceed the $2,000 SSI limit and they lose SSI and Medicaid benefits.
The ABLE Act should allow disabled workers (provided they were disabled before age 26) to deposit their excess earnings into an ABLE account. (Note that the $14,000 annual contribution and $100,000 balance restrictions will apply.) They can save for future expenses and needs while maintaining their SSI and Medicaid eligibility. This increase in savings and resources will hopefully allow them to "achieve a better life experience."  
The bottom line: the ABLE Act is a beneficial law that will help some disabled persons. It may be particularly useful to shelter some of the excess earnings of the working disabled. But funding a special needs trust will typically be a better option for parents, grandparents, and other third parties.   

Further Information

The ABLE Act was included as part of The Tax Increase Prevention Act of 2014 that President Obama signed on December 16, 2014. If you use the above hyperlink see Division B of that Act at page 125 for the specific provisions of the ABLE Act. 

Tuesday, December 16, 2014

New Medicaid Transfer Penalty Divisor in PA for 2015

The Medicaid program is the most significant source of potential government financial assistance for families struggling to meet the cost of long term care.
Qualification for Medicaid long-term care benefits is critical to meeting the care needs of many of Pennsylvania’s most frail elderly. But, an applicant can be ineligible for those benefits if he or she has disposed of assets for less than fair market value during a five year look-back period. 
Imposition of a transfer penalty denies benefits for individuals who otherwise need and qualify for Medicaid long term care benefit. A denial can also effectively make an individual’s children liable for the costs of the needed care. See: Children can be liable for a parent’s long term care costs in Pennsylvania.
The transfer penalty applies when a transfer was made by the individual applying for Medicaid long-term care benefits, or their spouse, or someone else acting on their behalf.
Unless the transfer is for some reason exempt, if an asset was transferred for less than fair consideration within the look-back period, then a period of ineligibility is imposed based on the uncompensated value of that transfer.
New Penalty Divisor for 2015
The length of the penalty period is calculated by taking the uncompensated value of the transfer and dividing it by the average private patient cost of nursing facility care in Pennsylvania at the time of application for benefits. The average cost to a private patient of nursing facility care is often referred to as the “private pay rate” or the “penalty divisor.”
The penalty divisor is revised each year as nursing facility care costs increase. As of January 1, 2015, the penalty divisor will be set at $293.15 per day. This means that the Department of Human Services (formerly Department of Public Welfare) has calculated that the average monthly nursing facility private pay rate in Pennsylvania is $8,916.65 a month.
Uncompensated transfers made during the look-back period will be calculated at one day of ineligibility for every $293.15 transferred away. In Pennsylvania, transfers penalties will be imposed when the value of transfers made in a month exceeds $500.   
The rules are complicated. Seniors considering making gifts or other transfers of assets may want to consult with an experienced elder law attorney before completing the transaction.

Monday, December 15, 2014

PA’s New Law on Powers of Attorney: What You Need to Know

A Guide for Consumers and Their Advisors
Pennsylvania has made dramatic changes to the laws governing financial powers of attorney (POAs). The new rules apply mainly to POAs that you create in order to allow someone else to manage your financial and property matters such as in the event of your future disability or incapacity.
The new law, Act 95 of 2014, is designed to better protect you from potential financial abuse. It is also intended to protect financial institutions and other third parties from liability for accepting a power of attorney that later is determined to have been invalid.
These well-intentioned changes come at a cost to consumers. When the new law takes full effect on January 1, 2015, POAs will be more complicated to prepare, more difficult to get properly executed (two witnesses and a notary are required), and more susceptible to rejection by your bank. And you will need expert help if you want your POA to give your agent authority to protect your assets and qualify you for benefit programs in the event you ever need long-term care at home or in a nursing facility.
Here are some things that consumers and their advisors need to know about the new law.
What is a Power of Attorney?
A Power of Attorney (POA) is a written document in which you (the “principal”) give another person (your “agent”) the authority to act on your behalf for the purposes you spell out in the document. Most POAs are “durable” meaning they continue to operate and are legally valid even after you become disabled or incapacitated.
Why is it Important to have a Power of Attorney?
A POA gives you better control over your future. With a POA you decide who will be authorized to act for you in the event an accident or illness, and you define the powers and authority that person will have. If you have a family, your POA can help prevent family disputes and allow your agent to meet your family’s needs during the time you are incapacitated.  
If you do not have a POA and become unable to manage your financial affairs, it may become necessary for a court to appoint someone to handle your finances. In Pennsylvania this person is referred to as your “guardian.”  Your court-appointed guardian may not be the person you would have chosen. A guardian has whatever powers the court gives them. This may be very different than the powers you would want them to have. You can usually avoid putting yourself and your family through this kind of costly and embarrassing public court proceeding by creating a POA. 
So, having a POA gives you the freedom to choose the person you think is best suited to step in for you in the event of your incapacity. It allows you to decide, while you are competent, not only who that person will be, but what powers they will have. It protects both you and your family. It is a vastly important and relatively inexpensive document. Every responsible adult should have a POA.
What changes does Act 95 make?
In its many pages, Act 95 makes numerous changes to the law governing POAs. Some of these are obvious, while others are more subtle but important. In this article, I will highlight some of the changes that are most significant to older adults and their agents and advisors. 
1. Notice and Acknowledgement. The most obvious changes are to the notice and acknowledgment forms that are signed by the principal and the agent.
The principal signs a notice form that contains state mandated information about the significance of the POA. Act 95 revises the language that is to be used in the notice. The new Act 95 language warns the principal that a grant of broad authority may allow the agent to give away the principal’s property while the principal is alive or change how the principal’s property is distributed at death. The notice advises the principal to seek the advice of an attorney.
The agent signs an acknowledgment form accepting the duties that go with acting as an agent, and agreeing to act in conformity with the principal’s expectations, in good faith and only within the scope of the authority granted in the document. The form must be in substantial conformity with the new language set out in the Act. An agent has no authority to act until he or she has signed this acknowledgment form and it is affixed to the POA document.    
It is important to note that Act 95’s provisions regarding the new language in the notice and acknowledgment forms do not take effect until January 1, 2015. POAs signed before that date should continue to use the language from the prior law.  
2. New Execution Requirements – 2 witnesses and notarization. Before Act 95, there was normally no requirement that a POA be notarized or even witnessed. The new law requires both. Beginning with documents signed on or after January 1, 2015, a POA must be notarized and have two qualified witnesses.
The new requirements for witnesses and notarization are seen as being more protective of the principal by reducing the potential for situations involving undue influence or duress or for POAs being signed by individuals who don’t know what they are doing. Having documents witnessed and notarized carries the additional benefit of resulting in documents that can be recorded if needed, as with real estate transactions. 
On the minus side, these more demanding requirements may raise the expense of getting a POA signed, especially when the signing is to take place in a nursing home or other institution. Many institutions won’t let their staffs witness legal documents so witnesses and notaries are hard to find at such locations.
Note that commercial POAs used in commercial transactions are exempt from these requirements. And POAs that are limited to health care do not have to be notarized. 
3. The Agents powers and duties must be laid out with greater care.
A POA can be an inexpensive, efficient and relatively private method of managing your financial affairs. A skillfully prepared POA which gives your agent asset protection authority is the crucial planning tool that can protect your family’s financial security in the event of your incapacity.
But, in the wrong hands, a POA can also be an instrument of financial exploitation. So, the law tries to strike a balance which gives you the ability to give your agent the powers you desire him or her to have, but which also helps prevent, detect, and prosecute abuse by the agent.
The abuse prevention protections in Act 95 include provisions that specify duties that the agent owes to the principal as well as limitations on the certain actions that may be taken by the agent.
The agent’s duties are divided into mandatory duties that apply in every case, and default duties that the principal can waive in appropriate circumstances. The agent’s mandatory duties are to act in good faith, within the scope of the authority granted, and in accordance with the principal’s expectations. These cannot be waived.
Duties you may want to waive. In addition to those mandatory duties, your agent will be subject to a number of default duties which will apply unless the POA specifically directs otherwise. These “waivable duties” are set out in § 5601.3 of Act 95. Among other things, they include duties to keep the agent’s and principal’s funds separate, to keep a record of all receipts, disbursements and transactions made on behalf of the principal, and to attempt to preserve the principal's estate plan.    
You may decide that your agent should not be bound by some of these requirements. For example, you may want to relieve your agent from the requirement to keep a receipt every time they buy something on your behalf. Or you may want your child/agent to be able to commingle your funds with theirs, or to transfer some of your assets in order to facilitate your eligibility for Medicaid, VA pension, or other benefit programs. If you want to release your agent from any of these duties, that waiver must be included in your POA document.  
Powers you may want to grant. The law also attempts to reduce the potential for financial abuse by prohibiting your agent from taking certain actions unless they are specially authorized in your POA. Lawyers have taken to referring to these actions that must be expressly authorized as “hot powers.” The hot powers include actions that have the potential to dissipate your property or change your estate plan - like making a gift on your behalf or changing a beneficiary designation on an insurance policy or IRA. If you want your agent to have any of these powers, the authority must be set out in your POA document.
For example, if you are naming your daughter to be your agent, you may want her to have the authority to transfer assets to your wife so that you will be able to qualify for Medicaid assistance if you ever need nursing home care. Or, you may want your agent to be able to make gifts to a disabled child, or to a charity you favor, or to support your family. If so, such authority must be included in the POA document.
As you can see, one size does not fit all when it comes to POAs. The duties and powers you want your agent to have are going to depend on your unique circumstances. You can’t rely on a standard form document to meet your needs.
When you see a lawyer to have a POA prepared, be sure to discuss whether the document will waive any of default duties and grant any of the “hot powers.” If your lawyer does not bring up this topic, you should raise it yourself. Or find another lawyer. These issues are just too important to ignore.
4. Third Party Refusals. A POA is useful only if it will be accepted by the financial institution or other third party to whom it is delivered. So, the law includes provisions that can penalize a third party for refusing to accept your POA. On the other hand, the law attempts to protect you from abuse by permitting third parties to question a POA when they have a suspicion that something is amiss or your agent is acting beyond the granted powers.
The new law expands the ability of third parties to question a POA that they are asked to accept. They are not required to accept a POA if they believe in good faith that the document is not valid or the agent does not have the authority to perform the act requested. A POA can also be refused if the third party makes a report to the local protective services agency, or if they know that a report has already been made.
In addition, before accepting the POA a third party can ask the agent to certify that it has not been revoked or otherwise terminated and to provide other factual information concerning the principal, agent or POA. An agent can also be required to obtain an opinion of counsel as to whether the agent is acting within the scope of authority granted under the document.
If the agent has fully complied with the requirements of the law, a third party that refuses to comply with the proper instructions of the agent is subject to liability for financial harm caused to the principal by the refusal and to a court order mandating acceptance of the POA.
5.  Exemption of Health Care Powers of Attorney from some Requirements.
Act 95’s requirements regarding notarization, the notice signed by the principal, the acknowledgment signed by the agent, and the provisions relating to an agent’s duties do not apply to a power of attorney which exclusively provides for making health care decisions or mental health care decisions. Nor do these financial protection provisions apply to certain POAs used in certain commercial transactions.
6. Should you Update your Existing POA?
Some of the most noticeable changes made by Act 95 do not apply to POAs that were created before the changes become effective. This includes the new witness and notary rules, the new notice and acknowledgment forms, and the requirements for authorizing “hot powers” authority. POAs that used the old notice and acknowledgment forms and that were in conformity with the law at the time they were signed remain valid.   
It is notable that the changes to the duties placed on agents do apply to any actions taken by an agent after January 1, 2015. This is true even though the POA itself predates the new law. These changes include the requirements that the agent act so as not to create a conflict of interest and that the agent attempt to preserve the principal’s estate plan. Act 95 provides that these duties can be waived in the POA document. But, that may be a problem for documents that were created before the provisions of Act 95 were known.   
In addition, if you have an old pre-Act 95 POA, your agent may run into practical difficulties using it after 2015. Even though your old POA may remain valid, a bank officer or other third party may not be comfortable making that decision. A financial institution may ask your agent to provide an opinion of counsel. Or, since they are not experts on the new law, some may just (however improperly) reject an older POA that does not contain the updated notice and acknowledgment forms.
So, while Act 95 does not require that you get a new POA, it makes sense to have your current document reviewed by a lawyer who is familiar with the new law. Legally, existing POAs remain valid. Practically, your old POA may not be the best document for you or your agent.  You may want to update your POA so that it will more likely be readily accepted by your bank and other financial institutions.
While you are getting your existing document reviewed for adequacy under the new law, be sure to consider whether it truly meets your current needs and circumstances.  For example: 
  • Is the person you named as agent still the best person for the job?
  • Should the person(s) you named as back-up agent(s) be changed? 
  • Does your document accurately express your desires regarding the duties being placed on your agent and any hot power authorities he or she is given?  
  • Should some of the agent's duties be waived so that a trusted family member who is your designated agent doesn’t violate them?
Be especially wary of any POA that was not prepared by a lawyer who is an expert in the requirements of Pennsylvania law on the subject. And if your document was not prepared by a lawyer (for example, if you got it online) you cannot rely on its adequacy. Don’t be penny wise and dollar foolish - see a lawyer.
Bottom Line: 2015 seems like the perfect time to review the quality and appropriateness of your existing POA and update it as needed.
Further Reading
Act 95 makes changes to Title 20, Chapter 56 of the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa.C.S. §§ 5601 - 5612). This statute and other Pennsylvania laws are available online on the Pennsylvania General Assembly website at
Last month I wrote a more concise article on the Act 95 changes. See, Now is a Good Time to Review your Power of Attorney

I wrote an earlier article on Act 95 when it became clear the law would be enacted. That article contains some additional information about the new law. See, Pennsylvania Revises Law on Powers of Attorney (June 19, 2014).
Power of Attorney: Things You Need to Know (April 12, 2014) discusses some critical issues you should consider before you have a power of attorney prepared.

Thursday, December 11, 2014

December is Deadline for Retirement Plan Distributions

If you have an IRA or workplace retirement plan and were born before July 1, 1944, you generally must take a required minimum distribution (RMD) from your plan(s) by December 31, 2014. 

If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out. The RMD rules apply to those with traditional IRAs and also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

There are some exceptions.

Just turned 70 ½ exception. Individuals born after June 30, 1943 and before July 1, 1944 are eligible for a special rule. The deadline for RMD payments is April 1, 2015, if you turned 70½ in 2014.Though payments made to these taxpayers in early 2015 can be counted toward their 2014 RMD, they are still taxable in 2015. This means there is the opportunity for these taxpayers to shift their RMD income between these years to minimize overall tax liabilities.

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. This means that those persons deferring their 2014 RMD to 2015 will end up having two taxable distributions to report in 2015.

Roth Exception. The required distribution rules do not apply to owners of Roth IRAs while the original owner is alive.

Still working Exception for Workplace Plans. Though the RMD rules are mandatory for all owners of traditional IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in IRS Publication 575.

Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The RMD for 2014 is based on the taxpayer’s life expectancy on Dec. 31, 2014, and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. (To compute your RMD you can use the online worksheets on or you can use the worksheets and life expectancy tables in the Appendices to IRS Publication 590.)

For most taxpayers, the RMD is based on Table III (Uniform Lifetime) in the IRS publication on IRAs. So for a taxpayer who turned 72 in 2014, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2014 RMD, this amount was on the 2013 Form 5498 normally issued to the owner during January 2014.

This blog post is based on information provided by the IRS in in Tax Tips Issue Number 2014-24 (December 9, 2014). You can find more information on RMDs, including answers to frequently asked questions, on

Additional Resources from the IRS:
  • Publication 590, Individual Retirement Arrangements (IRAs)
  • Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
IRS YouTube Video:
IRS Podcast: