When disabled children exist in the family

The GOP’s Tax Cuts & Jobs Act (TCJA) that was passed in late December, 2017 could impact your divorce process. 

Background and Context

The term “ABLE account” stands for achieving a better life experience for the benefit of a disabled child. An ABLE account provides a means for individuals and families to fund an account to support individuals who are blind or became severely disabled before the age of 26. The goal of the fund is to maintain their health, independence and quality of life.

Contributions to an ABLE account are not tax deductible. Yet, any earnings generated in the account are tax deferred. Any distributions made from the account are considered tax-free up to the amount of the disabled individual’s qualified disability expenses, which generally include housing, transportation, education, health, prevention and wellness, employment training and support, assistive technology and personal support services and other disability-related expenses. Copious records need to be maintained to substantiate the qualified disability expenses incurred. It is important to note that only one account can be established for each beneficiary.

Prior to the 2018 Tax Reform Act, the total amount that someone could contribute to an ABLE account was limited to the annual gift exclusion; in 2018 this amounted to $15,000. The 2018 Tax Reform Act modified this limitation to allow a beneficiary to make contributions to the ABLE account equal to the lesser of the prior year’s poverty level for a one-person household or the beneficiary’s taxable compensation for the year. For 2017, the poverty level for a one-person household was $12,060, which means for 2018, the beneficiary could contribute an additional amount equal to the smaller of the beneficiary’s taxable compensation or $12,060. 

The 2018 Tax Reform Act also allows for any distributions from a 529 plan to be tax free as long as it is rolled over into an ABLE account within 60 days from the date of the distribution. This rollover option is only available for years beginning after December 31, 2017 and ends on December 31, 2025. The amount of the rollover is limited based on how much was contributed for the year up to the maximum contribution available. In other words, although a rollover from a 529 plan distribution appears to be a rollover it still counts towards the total ABLE contribution limits allowed in a given tax year. People tend to rollover 529 plans after their disabled child has finished attending her or his education and monies exist in the 529 plan.

What are the implications of an ABLE account to a divorce?

In context to a divorce, the divorcing parties need to decide: 

  • how to handle an overfunded 529 plan
  • whether the account should be rolled over
  • if the amount rolled over exceeds the annual contribution, who should pay the tax or related penalty

Other issues that arise are:

  • should one party use funds to contribute to an ABLE account as part of the financial settlement
  • If so, where will the funds come from
  • will they be new or existing funds
  • will the funds have tax attributes associated to them
  • If so, how can the tax implications be managed

The couple has to agree on the funding source to fund the ABLE account. If after a mutual agreement is reached what happens if one or both parties fail to fund the account? Conditions need to be established in the divorce decree to ensure these types of violations are properly addressed.

About the Author

Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.

For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.

If You Have a Question

If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.

About Divorce Outcomes

Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:

  • unfold, analyze and repackage their financial life so they are well positioned after their divorce
  • preserve the value of their business or marital estate
  • continuously strive to provide a return on our services
  • build balanced financial solutions grounded in evidence
  • find ways to make our client, and at times both parties, money through the process
  • design their divorce to work for them and their family’s life
  • provide mental clarity to make decisions
  • reduce the total process time from start to close
  • minimize the stress and unpleasant memories that can last a lifetime

As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.

Learn more about us at divorceoutcomes.com or review our blogs to gain a clearer understanding about our approach and how we maximize the financial outcomes for our clients.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.

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