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Author: Elizabeth Brickfield

Tax Advantaged Special Need Planning Accounts

Traditional Special Need Planning has focused on the establishment and funding of Special Needs Trusts. Since 2014, families and friends can establish ABLE accounts as an additional vehicle for tax efficient savings for individuals with disabilities. Although ABLE accounts can be set up using any state’s program, twenty-one states have established programs, including Florida, Kentucky, Michigan, Nevada, Ohio and Tennessee, states where Dickinson Wright provides services to clients. What is an ABLE account? It is an account established for an individual who is blind or whose disability began before the age of 26.The individual with disabilities is the owner of the account. The total annual contribution to the account is limited to $15,000. Each individual with disabilities may own one account with a maximum amount of One Hundred Thousand Dollars before impacting an individual’s eligibility for SSI cash benefits. What is the advantage of an ABLE account? The earnings on the ABLE account assets are tax free, regardless of whether they are distributed. It is the equivalent of a 529 account for individuals with disabilities. What can be paid from an ABLE account? Qualified disability expenses are any expense related to the designated beneficiary as a result of living a life with disabilities and which can improve the health, independence or quality of life. Funds left in an ABLE account after the owner’s death are subject to Medicaid clawback....

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TAXATION OF THE SALE OF EXISTING LIFE INSURANCE POLICIES

The statutory increase of the federal estate/gift transfer tax threshold to over $5.6 million in value per individual (over $11 million for a married couple), the portability of unused exemption amounts on the death of the first spouse to die coupled with the current $14,000 annual gift tax exclusion has lessened reliance on the use of life insurance policies to pay estate tax. But, as a recent NY Times article explains clients contemplating the future of no longer needed policies should consider the possibility of a “viatical settlement”  – the sale of the policy during the insured’s lifetime for cash – rather than its surrender. Unlike the gratuitous inheritance of policy proceeds, sales of policies by an owner whose medical condition is not terminal (or in certain cases, chronic) creates taxable income which is taxed as ordinary income, capital gain or a combination of both depending upon the cash value of the policy, the components of the premium payments, the cost of insurance, whether the increase is cash value is a result of untaxed income and the age of the policy. For the third party buyer of such an investment, the net proceeds of the policy are always taxable income. Because life insurance is a state regulated product, the permissibility of such sales and their investment character (is it a security?) varies from state to state. Clients should be...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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