ABLE Accounts: Learning about this useful tool

An issue many parents of children with special needs face when determining their estate planning wishes is how to maintain their children’s eligibility if the child was to suddenly inherit a windfall if the parents pass.  Through the use of a Special Needs Trust within their estate plan, parents can ensure that their disabled child will not lose her eligibility for governmental assistance, be it Supplemental Security Income (SSI), SNAP, Medicaid, or the like.  However, a new law passed by Congress and signed by President Obama in December 2014 will allow a fresh opportunity for parents to save money for their child receiving public benefits.  This law is called the Achieving a Better Life Experience Act (ABLE Act for short).  Here are some worthwhile facts to know about this new law:

1.) The ABLE Act Amends the Internal Revenue Code

In passing this law, Congress amended the Internal Revenue Code of 1986 “to provide for the tax treatment of ABLE accounts established under State programs for the care of family members with disabilities.”  What now exists following Section 529 (creator of 529 education savings accounts) is Section 529A, which houses the ABLE Act.

2.) ABLE Accounts Provide Benefits for Individuals With Disabilities

Individuals with disabilities regularly depend on public benefits for income, health care, food, and housing assistance.  The eligibility standards for these benefits have been very stringent in the past, basically requiring that in order for an individual to qualify for benefits, the individual must remain very poor.

ABLE savings accounts allow eligible individuals and families to have savings over the eligibility threshold without jeopardizing their eligibility for public benefits like SSI and Medicaid.  The legislation explains that an ABLE account will, with private savings, “secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary’s employment, and other sources.”

3.) ABLE Accounts Have Tax Benefits

Eligible ABLE accounts are tax-advantaged savings accounts for individuals with disabilities.  The ABLE account acts much like a Roth IRA in that while contributions to an ABLE account are not tax deductible, all income earned by the ABLE account is tax-free when used for a qualified expense.

4.) A Beneficiary of an ABLE Account Must Meet Eligibility Standards

The ABLE Act limits eligible beneficiaries of ABLE accounts to individuals with significant disabilities that have an age of onset before turning 26 years old and either is already eligible for SSDI and/or SSI or meets the definition of having “marked and severe functional limitations.”   This means that an 18 year old with significant disabilities is immediately eligible for an ABLE account.  A 34 year old with significant disabilities could also be eligible for an ABLE account if the onset of his significant disabilities occurred prior to the time he turned 26 years old.

5.) There Are Limits on Money in an ABLE Account and How the Money Can be Spent

Total annual contributions to an ABLE account will be limited to $14,000, adjusted annually for inflation.  Lifetime total contributions to an ABLE account will be subject to the individual state and their limit for education-related 529 savings accounts.  Only the first $100,000 in an ABLE account is exempt from the SSI individual resource limits.

Funds from an ABLE account may only be used for the benefit of the disabled beneficiary of the account for education, housing, transportation, employment training, health, and other expenses that will be further determined once the regulations governing the law are issued, expected this year.

Also, an individual may only have one ABLE account in their name.

6.) There is a “Payback Provision” to Medicaid

An important factor for families thinking about setting up an ABLE account to consider is the requirement that Medicaid be reimbursed for payments made on the account beneficiary’s behalf at the death of the beneficiary.  This means that if the beneficiary passes away with any sum of money left in the ABLE account, some, if not all, of the account will be paid to Medicaid as a reimbursement.  For most families, this is not an ideal scenario.

Overall, this new act could be a great opportunity for parents to save money for their child with a disability during their lifetime without affecting their eligibility for SSI and Medicaid benefits.  We hope to see New York State provide the framework for setting up ABLE Accounts in New York by the year end.

 

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