At the end of 2014, the Achieving a Better Life Experience (ABLE) Act became law in the United States, allowing people with disabilities to create ABLE accounts.
ABLE accounts allow a person who became disabled before age 26 to create a special bank account. Money in the account is not counted towards Medicaid and SSI resource limits, and won’t disqualify the owner from receiving these benefits. The money has to be used to pay for “qualified disability expenses” such as education and transportation.
ABLE accounts serve a similar function to special needs trusts, but do not replace them, for two important reasons.
First, an ABLE account can’t hold more than $100,000 without affecting Medicaid and SSI eligibility. There is also an annual limit on how much you can contribute to an ABLE account, equal to the federal gift tax exclusion (which is $14,000 in 2015). A special needs trust is usually used for lump sum payments, such as an inheritance or a lawsuit settlement. With the $14,000 annual contribution limit, an ABLE Account wouldn’t be able to accept a sizable inheritance or settlement, so unless the remainder of the funds were held in a special needs trust, the person with disabilities would lose his benefits. (There also is no restriction on how a special needs trust must be spent, while an ABLE account must be spent on qualified disability expenses.)
Second and more importantly, ABLE accounts involve a trap for the unwary. An ABLE account must repay Medicaid for assistance on the disabled person’s death, and then pay the remainder to the state. So if any money is left in the ABLE account when the owner dies, it has to go to the government instead of the owner’s family. By contrast, a third-party special needs trust need not repay Medicaid, and the remainder can be left to other family members. A third-party trust is typically used for gifts or an inheritance, so if you intend to leave money to your child that may last beyond his lifetime, it should be held in a special needs trust and not an ABLE account.
ABLE accounts are a welcome development, and very useful for certain things. ABLE accounts can be great to hold modest payments, such as small gifts from family or income from part-time work. But ABLE accounts do not replace special needs trusts.