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.
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 2016). 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.
In other words, anyone can contribute to an ABLE account, but the account can only accept up to $14,000 per year as of 2016. 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).
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) is an addition to the existing law that created 529 plans.
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.
ABLE Account vs. Special Needs Trust
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 is usually used to hold windfalls such as an inheritance 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 2016). 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 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
This section was last updated June 1, 2016. As of that date, only one state in the country has an ABLE program up and running: Ohio. Fortunately, Ohio is allowing people across the country to open Ohio ABLE accounts. The account can be created through www.StableAccount.com.
New Jersey is expected to have its ABLE program running in late 2016. 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 Ohio now, and roll it over to a New Jersey account once that program has begun.