If you have a loved one with disabilities, you
may be familiar with “ABLE” accounts, authorized by Congress in 2014 under the
Achieving a Better Life Experience Act.
ABLE accounts are tax-advantaged savings accounts–similar to 529
education savings plans–whose funds can be used to pay for certain qualifying
expenses of disabled individuals. As a result of the Tax Cuts and Jobs Act
(TCJA), there are several changes that affect ABLE accounts.
You Should Know
First, a 529 account can now be rolled over to
an ABLE account. However, the ABLE account must be for the same beneficiary as
the 529 account or for a member of the same family. Previously, families who
originally funded a 529 account for a child whose disability manifested later
in life would suffer a tax penalty if the funds were withdrawn from the 529
account to cover medical expenses because they were not allowable education
expenses. Now those same funds, through
the use of the rollover, can be made available for the beneficiary’s
disability-related expenses. There are limits as to how much can be rolled
over, so it is important to discuss any changes to a 529 plan with your tax
Second, a beneficiary of an ABLE account can
now contribute their personal earned income into their own account. The maximum
amount a beneficiary can contribute is equal to the annual federal poverty
level for a one-person home ($12,490.00 in 2019 in the continental United
States and the District of Columbia). These contributions, however, are
separate and apart from contributions
made to the ABLE account by other individuals (family members, friends,
estates, trusts, etc.). Further, a
working beneficiary will not be eligible to contribute their own money to the
ABLE account if their employer contributes to a workplace retirement plan on
his or her behalf.
Third, those beneficiaries who contribute to
their own ABLE account, as opposed to others who contribute to the account, may
be eligible for the Saver’s Credit. Up to $2,000 of the contributions made by
ABLE account beneficiaries may be eligible for this credit. This may help lower any income tax owed by
the beneficiary or help increase any refund the beneficiary may be entitled to.
There are, however, additional requirements that need to be met and it is
important to check with an experienced professional to determine what credits
may be available for a beneficiary who contributes to their own account.
It is important to know that ABLE accounts, as well as Special Needs Trusts, have an underlying purpose: to supplement, not replace, the benefits and services provided by government programs like Medicaid and Supplemental Security Income (SSI). If you have a loved one with special needs, contact me at (858) 432-3923 to help guide you through the process of creating a plan that best suits your family’s needs. I look forward to discussing your specific needs and objectives with you!
In the first part of this series, I discussed the first three of six questions you should ask yourself when selecting a life insurance beneficiary. Here I cover the final half.
Selecting a beneficiary for your life insurance policy sounds pretty straightforward; however, given all of the options available and the potential for unforeseen problems, it can be a more complicated decision than you might imagine.
For instance, when purchasing a life insurance policy, your primary goal is most likely to make the named beneficiary’s life better or easier in some way in the aftermath of your death. However, unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.
Last week, I discussed the first three of six questions you should ask yourself when choosing a life insurance beneficiary. Here I cover the remaining three:
4. Are any of your beneficiaries minors?
While you’re technically allowed to name a minor as the beneficiary of your life insurance policy, it’s a bad idea to do so. Insurance carriers will not allow a minor child to receive the insurance benefits directly until they reach the age of majority.
If you have a minor named as your beneficiary when you die, then the proceeds would be distributed to a court-appointed custodian tasked with managing the funds, often at a financial cost to your beneficiary, even if the minor has a living parent. As a result the child’s other living birth parent would have to go to court to be appointed as custodian if he or she wanted to manage the funds. Additionally, in some cases, that parent would not be able to be appointed (for example, if they have poor credit), and the court would appoint a paid fiduciary to hold the funds.
Rather than naming a minor child as beneficiary, it’s better to set up a trust for your child to receive the insurance proceeds. With a Trust you get to choose who would manage your child’s inheritance, and how and when the insurance proceeds would be used and distributed.
5. Would the money negatively affect a beneficiary?
When considering how your insurance funds might help a beneficiary in your absence, you also need to consider how it might potentially cause harm. This is particularly true in the case of young adults.
For example, think about what could go wrong if an 18 year old suddenly receives a huge windfall of cash. The 18 year old might blow through the money in a short period of time and even worse, getting all that money at once could lead to actual physical harm (even death), as could be the case for someone with a substance-abuse problem.
To help mitigate these potential complications, some life insurance companies allow your death benefit to be paid out in installments over a period of time, giving you some control over when your beneficiary receives the money. However, as discussed earlier, if you set up a trust to receive the insurance payment, you would have total control over the conditions that must be met for proceeds to be used or distributed. For example, you could build the trust so that the insurance proceeds would be kept in trust for beneficiary’s use inside the trust, yet still keep the funds totally protected from future creditors, lawsuits, and/or divorce.
6. Is the beneficiary eligible for government benefits? Considering how your life insurance money might negatively affect a beneficiary is absolutely critical when it comes to those with special needs. If you leave the money directly to someone with special needs, an insurance payout could disqualify your beneficiary from receiving government benefits. Under federal law, if someone with special needs receives a gift or inheritance of more than $2,000, they can be disqualified for Supplemental Security Income and Medicaid. Since life insurance proceeds are considered inheritance under the law, an individual with special needs SHOULD NEVER be named as beneficiary.
To avoid disqualifying an individual with special needs from receiving benefits they may genuinely need, you would create a “special needs” trust to receive the proceeds. In this way, the money will not go directly to the beneficiary upon your death, but be managed by the trustee you name and dispersed per the trust’s terms without affecting benefit eligibility.
The rules governing special needs trusts are quite complicated and can vary greatly from state to state, so if you have a child who has special needs, meet with me, an experienced estate planning attorney, to ensure you have the proper planning in place, not just for your insurance proceeds, but for the lifetime of care your child may need.
Make sure you’ve considered all potential circumstances
These are just a few of the questions you should consider when choosing a life insurance beneficiary. Consult with me to be certain you’ve thought through all possible circumstances.
If you think you may need to create a trust—special needs or otherwise—to receive the proceeds of your life insurance, please feel free to contact me so I can properly review all of your assets and consider how to best leave behind what you have in a way that will create the most benefit—and the least challenges—for the people you love. Schedule your Family Wealth Planning Session today by calling me at (858) 432-3923. I look forward to being of service to you and your family!
Selecting a beneficiary for your life insurance policy sounds pretty straightforward. You’re just deciding who will receive the policy’s proceeds when you die, right?
But as with most things in life, it’s a bit more complicated than that. It can help to keep in mind that naming someone as your life insurance beneficiary really has nothing to do with you: It should be based on how the funds will affect the beneficiary’s life once you’re no longer here.
very likely that if you’ve purchased life insurance, you did so to make
someone’s life better or easier in some
way in the wake of your death. But unless you consider all of the unique
circumstances involved with your choice, you might actually end up creating
additional problems for the people you love.
Given the potential complexities involved, here are a few important questions you should ask yourself when choosing your life insurance beneficiary:
1. What are you intending to accomplish?
The first thing to consider is the “real” reason you’re buying life insurance. On the surface, the reason may simply be because it’s the responsible thing for adults to do; however, I recommend you dig deeper to discover what you ultimately intend to accomplish with your life insurance.
Are you married and looking to replace your income for your spouse and kids after death? Are you single without kids and just trying to cover the costs of your funeral? Are you leaving behind money for your grandkids’ college fund? Are you intending to make sure your business continues after you’re gone? Or perhaps your life insurance is in place to cover a future estate-tax burden?
The real reason you’re investing in life insurance is something only you can answer. The answer is critical, because it is what determines how much and what kind of life insurance you should have in the first place. By clearly understanding what you’re actually intending to accomplish with the policy, you’ll be in a much better position to make your ultimate decision on who to select as beneficiary.
2. What are your beneficiary options?
Your insurance company will ask you to name a primary beneficiary – your top choice to get the insurance money at the time of your death. You may also name a contingent beneficiary who will receive the insurance money if your primary beneficiary predeceases you. If you fail to name a beneficiary, the insurance company will distribute the proceeds to your estate upon your death. If your estate is the beneficiary of your life insurance, that means a probate court judge will direct where your insurance money goes at the completion of the probate process.
This process can tie your life insurance proceeds up in court for months or even years. To keep this from happening to your loved ones, be sure to name, at the very least, one primary beneficiary.
For maximum protection, when naming your primary beneficiary, you should probably name more than one contingent beneficiary in case both your primary and secondary choices have died before you. Yet, even these seemingly straightforward choices are often more complicated than they appear due to the options available. For example, you can name multiple primary beneficiaries, like your children, and have the proceeds divided among them in whatever way you wish. What’s more, the beneficiary doesn’t necessarily have to be a person. You can name a charity, nonprofit, or business as the primary (or contingent) beneficiary.
It’s important to note that if you name a minor child as a primary or contingent beneficiary (and he or she ends up receiving the policy proceeds), a legal guardian must be appointed to manage the funds until the child comes of age. This can lead to numerous complications (which I’ll discuss in detail next week in Part Two), so you should definitely consult with an experienced attorney if you’re considering this option.
When selecting your beneficiaries, you should ultimately base your decision on which person(s) or organization(s) you think would most benefit from the money. In general, you can designate one or more of the following examples as beneficiaries:
- One person
- Two or more people (you decide how money is split
- A trust you’ve created
- Your estate
- A charity, nonprofit, or business
3. Does your state have
If you’re married, you’ll likely choose your spouse as the primary beneficiary. However, unless you live in a state with community-property laws, you can technically choose anyone: a close friend, your favorite charity, or simply the person you think needs the money most.
That said, if you do live in a community-property state, your spouse is entitled to the policy proceeds and will have to sign a form waiving his or her rights to the insurance money if you want to name someone else as beneficiary. Currently, community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Next week, I’ll continue with Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.
As an experienced Estate Planning Attorney I can guide you to make informed, educated, and empowered choices to plan for yourself and the ones you love most. Contact me at (858) 432-3923 today to get started with a Family Wealth Planning Session. I look forward to serving you!