Since I’ll be speaking about the ABLE Act next week at the New Jersey Institute for Continuing Legal Education’s 21st annual Sophisticated Elder Law Conference, now would be a good time to mention that there have been some recent developments with ABLE accounts.
For readers who don’t know, an ABLE account is a legal instrument made possibly by a new federal law signed in late 2014. It’s sort of a hybrid between a special needs trust and a 529 college plan.
With an ABLE account, families set money aside in a special account to benefit a person with disabilities, who became disabled before age 26. The money in the account is invested, and up to $100,000 in the account won’t disqualify the beneficiary (the person with disabilities) for SSI or Medicaid. If the money in the account is withdrawn to pay for a “qualified disability expense,” then the gain on the investment is not subject to income tax.
Of course, ABLE isn’t as good as it sounds (what ever is?). Contributions are limited to the federal gift tax exclusion amount, which is currently $14,000 per year. And when the beneficiary dies, any remainder in the ABLE account has to repay Medicaid. These limitations render the ABLE account useless in most cases for holding an inheritance or lawsuit recovery, so don’t change your will just yet.
While ABLE accounts were created by the federal ABLE Act of 2014, there had been few details on how ABLE will actually be implemented in New Jersey – until recently. In June 2014, the U.S. Treasury Dept. and IRS issued joint proposed regulations on ABLE. And recently, NJ Senate Majority leader Steve Sweeney introduced S2770, a bill implementing ABLE accounts in New Jersey.
From these two sources, the community can glean new guidance on how ABLE accounts will ultimately be administered in New Jersey. I’ve closely reviewed the proposed regulations and NJ bill, and I think there are a few important take-aways.
First, the feds will be permissive / broad in interpreting what counts as a “qualified disability expense.” (E.g., they’ve said: “expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism”.) This is very good news for families, as it means they’ll have less trouble making tax-free withdrawals from ABLE accounts as the law intended.
That said, there will likely be some kind of bureaucratic procedure to making withdrawals from an ABLE account, since the NJ bill says that a guardian or power of attorney agent will have to apply to make withdrawals. Presumably, application would be made to the New Jersey Division of Developmental Disabilities, which will serve as Trustee of New Jersey’s ABLE Trust.
Finally, under the NJ bill it looks like withdrawals can only be made by a beneficiary’s guardian or power of attorney agent. This could be a problem, since many people with disabilities don’t have capacity to sign a power of attorney, and many family caretakers don’t yet have a guardianship.
While there are problems with ABLE accounts and their implementation, the creation of ABLE is clearly a good thing, and we look forward to using at as a new tool to help our clients ensure the best possible care for loved ones with disabilities.
For more information on ABLE accounts and providing for a loved one with special needs, please call or email us today.