The New Jersey ABLE Act became law today.
Under the ABLE program, persons who became disabled before age 26 can open an ABLE account, and become the beneficiary of that account.
The beneficiary and their family or friends can contribute up to the amount of the annual gift tax exclusion to an ABLE account (currently $14,000 per year). The ABLE account holds that money, and is managed and invested by the state. Any growth on the money in the ABLE account is tax-free, provided it is spent on “qualified disability expenses” for the beneficiary. Qualified disability expenses are defined broadly, and include things like education, healthcare and professional services.
An ABLE account can hold up to $100,000 per year without disqualifying the beneficiary from Supplemental Security Income (SSI), and an unlimited amount without disqualifying the beneficiary from Medicaid. When the beneficiary dies, any remainder in the ABLE account has to be used to repay Medicaid for the amount it spent on the beneficiary.
ABLE is a welcome tool for people with disabilities and there families. But an ABLE account is not a replacement for a special needs trust. For large inheritances or lawsuit awards, the $14,000 annual contribution limit and $100,000 total limit would be problematic. Moreover, third-party special needs trusts have no obligation to repay Medicaid, while ABLE accounts do.
There remain a number of open questions on ABLE – how will New Jersey administer accounts, how will the money be invested, how will beneficiaries make withdrawals and how will the state decide whether withdrawals are qualified disability expenses, among other questions. It looks like ABLE won’t take effect until October 2016, so hopefully these questions will be resolved before then.