ABLE Accounts

An ABLE account is a new tool for families of people with special needs made possible by the federal Achieving a Better Life Experience (ABLE) Act. It is a financial account in which money can be set aside for a person with qualifying serious disabilities, without that money disqualifying her from certain means-tested disability benefits, including Medicaid and Supplemental Security Income (SSI).

Who can Open an ABLE Account

An ABLE account can only be opened by someone who became disabled before age 26, or by his guardian or agent under power of attorney. The age requirement can be met by showing disability aid started before age 26 or other means. Thus, simplicity may be furthered by opening an ABLE account before age 26.

ABLE Account Contributions

Like a retirement account, there are contributions limits on ABLE accounts. Each year, an ABLE account can accept contributions up to the federal gift tax exemption ($14,000 in 2017). Contributions can come from the beneficiary (the person with disabilities), or from anyone else, including the beneficiary’s parents or other family members, friends, an estate, trust or corporation. However, an individual can have only one ABLE account at a time.

In other words, anyone can contribute to an ABLE account, but the account can only accept up to $14,000 per year as of 2017. Any contribution beyond that must be returned.

Contributions to an ABLE account from someone other than the beneficiary count as gifts, so they can trigger a requirement to file a gift tax return.

ABLE and Disability Benefits

An ABLE account can hold up to $100,000 without that money being counted as a Resource for purposes of determining SSI eligibility. Money in an ABLE account is never counted as a Resource for Medicaid eligibility purposes. Since the Resource limit for SSI and Medicaid can be as little as $2,000, this is an important ABLE account benefit. In other words, you can have up to $100,000 in an ABLE account without the account knocking you off SSI, and an unlimited amount in an ABLE account without losing Medicaid.

ABLE and Taxes

Each state is meant to eventually have its own ABLE program, and the state (or third party contractors) will invest the money you put in an ABLE account. With the money invested, it will presumably grow over time.

Gains on the investments would normally be subject to income tax. However, ABLE accounts are not subject to income tax, as long as withdrawals are made only for qualified disability expenses (QDE’s). Nevertheless, as with 529 college saving plans, ABLE program expenses such as mutual fund fees can reduce ABLE account returns

QDE’s are expenses that relate to the beneficiary’s disability. This is interpreted somewhat broadly, and includes expenses for things like education, housing, transportation, employment training, assistive technology, health, financial management, legal fees and more.

Withdrawals up to the amount of QDE’s are not taxed, but any withdrawals beyond QDE’s must pay full income tax plus a 10% penalty. So it’s important to limit ABLE account withdrawals to QDE’s.

ABLE tax treatment is similar to that of a 529 college savings plan. In fact, the federal ABLE Act (26 U.S.C. 529A) supplements Internal Revenue Code section 529, which governs 529 plans.

Medicaid Repayment

When the beneficiary of an ABLE account dies, any money left in the ABLE account must be used to repay Medicaid for assistance provided to the beneficiary since the ABLE account was opened. For example, if Medicaid paid for doctor visits, hospital care, medicine or other health care, those expenses must be repaid from the remaining ABLE account balance before the ABLE account can go to anyone else. New Jersey Medicaid serves most participants through managed care organizations that impose a premium each month whether or not you use Medicaid that month. By the same token New Jersey Medicaid managed care organization monthly capitation premiums also may be subject to repayment by ABLE accounts. This is not a concern with third party special needs trusts (often called supplemental needs trusts).

ABLE Account vs. Special Needs Trust

Main page: Special Needs Trusts

An ABLE Account is not a replacement for a special needs trust. Each is a tool used for different purposes.

ABLE accounts are great for holding a modest amount of money given over time, for example, annual gifts from family, birthday or graduation gifts, or modest wages from part-time work (although wages from work may cause other issues with disability benefits).

A special needs trust (sometimes called supplemental needs trust or supplemental benefits trust) is usually used to hold windfalls such as an inheritance, large gift, or lawsuit settlement, where the beneficiary is getting a lot of money at once. An ABLE account wouldn’t work for a windfall, since ABLE accounts can’t accept more than a certain amount per year ($14,000 as of 2017). Therefore some of the money probably wouldn’t be able to go into the ABLE account, and may disqualify the beneficiary from Medicaid and SSI. A special needs trust, by contrast, has no contribution limit, so it avoids this issue.

An ABLE account also can only hold up to $100,000 before the money will disqualify the beneficiary from SSI. A special needs trust has no such limit.

In addition, ABLE accounts must repay Medicaid when the beneficiary dies. Special needs trusts that don’t contain the beneficiary’s funds (such as typical estate planning special needs trusts (also called supplemental needs trusts or SNTs) have no obligation to repay Medicaid. So in some situations, if you put money into an ABLE account instead of a special needs trust, you will be subjecting that money to government repayment when instead it could have gone to other members of your family.

The bottom line is that ABLE accounts are excellent for certain situations, but special needs trusts are still highly preferable for other situations. If a person with disabilities who receives means-tested public benefits like Medicaid and SSI stands to get a substantial inheritance or a large gift from family, or a settlement on a lawsuit, a special needs trust is highly advisable.

ABLE accounts can also be used in tandem with special needs trusts to yield favorable results in certain situations.

To learn more about how ABLE accounts and special needs trusts apply to your situation, call or email FriedmanLaw today.

How to Create an ABLE Account

Ohio was the first state to go live with its ABLE account program and probably is the most advanced. However, nationally, ABLE account programs are in a state of flux. As of spring 2017, several other states offer ABLE account options. FriedmdanLaw can help you compare different ABLE account options. One important factor should be the cost to open the ABLE account and investment expenses. Another consideration could be ease of dealing with the particular ABLE program. To see an up and running ABLE account program, visit Ohio’s ABLE account website at www.StableAccount.com.

New Jersey is expected to have its ABLE program running eventually. ABLE law provides for the beneficiary to roll-over funds from one account to another within sixty days with no tax penalty, so it may be possible to open an account in another state now, and roll it over to a New Jersey account once that program starts.