Category: A Closer Look

ABLE Account or Special Needs Trust

If you want to give assets to a loved one with a disability either during your lifetime or through your estate, you must plan carefully.

Otherwise, you could jeopardize their ability to qualify for public benefits (Supplemental Security Income and Medicaid).

While owning a house, car and other personal property does not negatively affect their benefits, most financial assets, including cash in the bank, will disqualify them from receiving benefits. And the current cap in order to qualify for public benefits is a mere $2,000!

Fortunately, there are ways you can leave assets to a family member with a disability while preserving their eligibility for Medicaid and other assistance.

SPECIAL NEEDS TRUST

A Special Needs Trust (SNT) is the most well-known strategy for helping a loved one with a disability while ensuring they continue to qualify for public benefits. This works because assets are left to the trust, not the disabled family member.

Within the trust document, you will appoint a trustee who will have complete discretion over the trust assets and will be in charge of spending money on your disabled family member’s behalf.

The trustee cannot give money directly to your loved one — that could interfere with eligibility for public benefits — but the trustee can spend trust assets to buy a wide variety of goods and services for them.

Special Needs Trust funds are commonly used to pay for personal care, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.

529 ABLE ACCOUNTS

The ABLE Act was signed into law in 2014, creating 529 ABLE (529A) accounts to provide a tax-advantaged vehicle for saving assets for disabled individuals.

The accounts are sponsored by states, but there are no residency requirements to enroll. Some states offer tax deductions for contributions but amounts and rules vary.

ABLE accounts can be created and managed by the beneficiary, subject to capacity. If they need assistance, the account can be established and/or managed by their parents, conservator/guardian or agent under a power of attorney.

Money in the ABLE account (up to the first $100,000) will not be subject to the $2,000 personal asset limit that determines eligibility for public benefits.

Another major benefit of the 529A account is its taxation. Unlike a Special Needs Trust, money coming out of a 529A account is tax-free if it’s going toward a qualified disability expense.

Qualified disability expenses include basic living expenses, housing, education, transportation, employment training and support, and health care prevention and wellness — but does not include supplemental expenses such as vacations or personal grooming.

Something to be aware of is that if the money in the 529A is used for non-qualified disability expenses, the earnings portion of the withdrawal would be subject to regular income tax and a 10% penalty.

In those states that have adopted special state income tax benefits, non-qualified withdrawals might also incur additional state tax penalties.

Which to Choose?

One of the primary aims of the ABLE program was to provide a solution for disabled individuals who do not have the support structure and financial means to create a Special Needs Trust.

ABLE accounts are a less expensive alternative to a Special Needs Trust as the fees are nominal — generally limited to maintenance and charges by financial institutions.

There are also several circumstances in which an ABLE account may be particularly useful. For example, an ABLE account would allow an individual with disabilities to save unspent work earnings or Social Security benefits for a future purchase without violating the general rule that the recipient of SSI and Medicaid cannot accumulate more than $2,000.

However, for most individuals with disabilities, an ABLE account is not a substitute for comprehensive Special Needs Trust planning.

Since they each have their own nuances that seem to pair well the other, the 529A and Special Needs Trust should be used side-by-side for families with disabled children and adults.

For example, a carefully drafted SNT can authorize the trustee to transfer money into the beneficiary’s ABLE account to maximize the benefits of both tools simultaneously.

Obviously, when trying to decide whether to establish a Special Needs Trust or an ABLE account, you should consult a special needs planning attorney about the suitability of these savings tools based on your own circumstances.

For help finding a special needs planning attorney, visit https://www.specialneedsalliance.org/find-an-attorney.


How To Find A Tax Preparer

A big shout-out to Stacy Antrobus for this week’s post idea! Thanks, Stacy!

As we make our way through yet another tax season, wading through W-2’s and 1099’s, you may find yourself feeling slightly overwhelmed.

If so, you’re not alone.

More than half of all taxpayers feel the complexity of tax laws and forms makes preparation too difficult and time-consuming.

Considering the multitude of tax preparation software and online resources available to aid taxpayers in filing their own return, at what point does it make sense to use a professional tax preparer?

And if you decide to use a professional, how do you choose the right one?

To self-prep or not to self-prEP

While there isn’t a black and white rule for determining if you should or should not self-prepare, there are certain situations in which you may want to get help from a professional.

Major life changes, such as marriage, divorce, inheritance, changes in your family or getting a new job are among the most common.

If you are self-employed, you may need the guidance of a tax professional when it comes to deciding what qualifies as business expenses and how to minimize your tax burden.

Generally, if you have complicated financial affairs or simply don’t want to deal with tax season, help from a professional is likely needed.

The U.S. Federal tax code, along with the supporting information, contains over 70,000 pages! Each one of them is a reason to ask for some help.

Who do you choose?

If familiarizing yourself with 70,000 pages of the tax code isn’t for you, your next step is to determine what kind of professional to use.

Tax professionals fall into a few different categories:

  • National tax services: H&R Block, Jackson Hewitt, etc. These services are best for taxpayers with relatively simple tax preparation needs.
  • Enrolled agents (EAs): Federally licensed individual tax practitioners who have passed a 2-day IRS-administered exam. They are qualified to handle tax preparation at various levels of complexity levels.
  • Certified public accountants (CPAs): Tax professionals who have a bachelor’s in accounting and have passed a grueling series of tests to gain the licensing. They prepare returns, can represent you in the event of tax problems, and can assist you with tax planning.
  • Tax attorneys: Lawyers who specialize in tax planning.

The fees charged by professional tax preparers can range from as little as  $100 to $1,000 or more, with fees largely driven by the complexity of your situation and the sophistication of the tax strategies employed by the professional you are working with.

From my own personal experience, I generally find that the majority of people utilize the services of a CPA.

Even though you are paying these professionals to help improve accuracy and minimize your tax liability, always check your own completed tax returns carefully before signing them.

You are ultimately responsible for the accuracy of your return.

To reduce the chance of error — particularly if you are self-preparing —  you should become familiar with basic tax principles and regulations, check all documents for accuracy, and request an explanation of any items on your return that you don’t understand.

How do you choose?

Since you are legally responsible for your tax returns, it is important to choose the right person to prepare them for you.

Here are a few things you can do to help you find the best tax preparer to work with and ensure your tax season goes as smoothly as possible:

  • Make sure that a prospective preparer has a PTIN – which all paid tax return preparers are required to have. These are issued by the IRS and you can search their database for any preparer who has one.
  • Make sure they don’t have disciplinary actions and check the status of any licenses they hold.
  • Be sure to compare fees and make sure you understand and accept the fee for services rendered. Never work with a preparer who asks for a percentage of your refund.
  • A good preparer will request records and receipts and ask you about your income and expenses to get a feel for your tax situation. If a preparer offers to file your returns without seeing your W-2 or other records, do not work with them!
  • Never use a preparer who asks you to sign a blank tax form. Never sign a document until you are able to review and verify its accuracy.

Shutdown, again

Today marks the 14th day of yet another federal government shutdown.

The negotiations for a more “permanent” resolution have become entangled over the funding of the US-Mexican border wall.

The buzzword back in 2017 was “DACA” the Deferred Action for Childhood Arrivals immigration policy and the time before that, in 2013, was “debt ceiling” and “affordable care act”, as politicians in both parties couldn’t come to an agreement to keep the government operating.

It seems not much has changed.

While a shutdown does have an effect on the economy and many federal government employees (about 800,000), most of the essential operations will continue. Which means those of us who are not employed by the federal government should only be slightly affected by it, at least for the time being.

Here are some of the services that I think have a direct impact on all of us and how the shutdown will affect them:

Social Security

Most of the Social Security Administration’s staff are exempt from the furloughs and Social Security checks will continue to go out as planned.

Postal Service

The Postal Service operates off its own revenue stream, so post offices will stay open and delivery will be unaffected.

Internal Revenue Service

While the IRS has not released it’s plan for the government shutdown ahead of time like it has done in the past, I suspect refunds will be delayed if the shutdown is not resolved soon.

2019 Medicare Advantage Plan Changes

Earlier this year, policymakers made changes to the certain aspects of Medicare Advantage plans, which may make choosing a Medicare Advantage plan more enticing going forward.

That’s because beginning next year, many Medicare Advantage plan (Part C) enrollees will have access to benefits that were previously unavailable, and are still unavailable to Original Medicare participants. 

New Benefits

For the first time in 2019, about 270 plans are providing nearly 1.5 million enrollees with access to the following new types of expanded health-related supplemental benefits:

  • adult day care services
  • in-home support services
  • caregiver support services
  • home-based palliative care
  • therapeutic massages
  • home safety devices and modifications
  • transportation to and from medical appointments
  • meals delivered to the home

It’s exciting to finally see these services being covered. There’s not a lot of things can be more demoralizing to a person than losing their independence and having to move into an assisted living facility.

These new benefits will hopefully increase the amount of time seniors can remain independent and in their homes!

Plan Changes and Open Enrollment

Plan costs and benefits change often and it’s worth looking at the choices available to see what will fit your current health needs. I’d recommend starting your search with Medicare’s Handbook. This is an excellent resource they provide to help you make an informed decision.

Open enrollment for 2019 ends December 7th, so you’ll want to decide soon if you want to make changes to your Medicare coverage.

How Reducing Risk Is Key To Long Term Success

My job as financial advisors is to help people recognize and then achieve their goals. Many people don’t realize that it rarely pays off to take on more risk than necessary to do so. In fact, it could result in failing to meet those goals at all.

How Do You Measure Risk?

A popular view is that you can measure risk by how much the markets rise and fall over time, or volatility. It’s true that volatile investments are seen as risky because they have a chance of large declines. But the measure of goal failure is really dependent on the magnitude of the loss and the timing.

Breaking Even

Imagine an investor who has $1 million in the market and experiences a loss of 50%, the investment is now worth $500,000. To get back to the $1 million starting point, they now need to generate a return of 100%. If they lose 40%, they’ll need a 67% return to get back to where they started. Yet, if the loss is contained to 20%, only a 25% return is needed to restore the $1 million.

What’s most important is the percent required to break-even after a loss. As the loss increases, the return required to make up for it also increases.

Is Time On Your Side?

Markets may generally rise over long time frames, but they spend a lot of time making up for previous losses. As can you can see in the chart below.


Real Investment Advice, 11/28/2016, The Long-Term Investing Myth, Lance Roberts

A sizable loss can be particularly devastating for those near, or in, retirement. Especially if they are already withdrawing from their portfolio for income. That’s because there usually isn’t enough time to make up for what was lost.

Even young investors who have decades before retirement need to be mindful of big losses. A negative return will negate compounding interest. This makes investing unnecessarily inefficient during the time required to recover from a large loss.

The bottom line is that not losing money is a powerful wealth building and preservation tool, no matter what age an investor is.