ABLE Accounts: Filling the Gap in Special Needs Planning
After many conversations with parents of children with special needs, I’ve come to find that many of my clients have one overarching concern: how to set aside money for the future needs of their children.
Prior to the passage of the Achieving a Better Life Experience Act (or ABLE, as it
is more commonly known), families had no significant tax benefits to save for things such as therapy or assisted living. To complicate matters, individuals with severe disabilities were limited to a maximum of $2,000 in liquid assets before they were deemed ineligible to receive government benefits.
This meant that, in addition to the day-to-day challenges that come with navigating a disability, many families faced an inability to save for the future, lest the individual lose their government benefits.
Before ABLE accounts became available, parents used the special needs trust as the primary vehicle to put money aside for their disabled children. Unfortunately, these accounts required an estate attorney to set them up, which meant that many people without the ability to pay to create the trust were left without alternatives.
With the passage of the ABLE Act, families with disabled young children now have the ability to set aside money for their care in a way that earns special tax benefits, similar to the way 529 plans are used to pay for education-related expenses.
Here are a few details about ABLE accounts, as well as points to consider if you plan to establish an account for someone in your family.
How ABLE Accounts Work
The specifics of the ABLE account are fairly straightforward:
- A maximum of $15,000 per year can be contributed to an ABLE account.
- The funds in the account are to be used for disability-related expenses only.
- A disabled individual can be named the beneficiary of only one ABLE account.
- The person who is named the beneficiary would have had to be blind or disabled before age 26 to qualify.
Benefits of ABLE Accounts
Contributions to ABLE accounts are not tax-deductible, which means that you cannot directly deduct any taxes as a result of simply having the account. However, all investment earnings remain untaxed as long as money from the account is used to pay for qualified disability expenses.
Qualified disability expenses encompass a wide variety of costs, including medical treatment, job training and transportation, as well as housing and legal fees.
Similar to the education-based 529 plans, money that is withdrawn from an ABLE account for anything other than qualified expenses requires that income tax be paid on that portion of the withdrawal, in addition to a 10% penalty that could also be levied.
A key feature—and one that many parents fought hard for—is a provision that allows for the first $100,000 in an account to avoid being treated as the personal assets of the account beneficiary.
This is important because, as mentioned, federal law prohibits individuals from receiving services like Medicaid and Supplemental Security Income (SSI) if they have more than $2,000 worth of financial assets. So by allowing the first $100,000 in an ABLE account to avoid being counted as personal assets, special needs individuals are able to benefit from funds set aside to cover disability-related expenses while still qualifying for government assistance.
Important Factors to Consider
While there is no doubt that the ABLE Act fills a significant gap in the planning needs for the families of children with disabilities, it is not without shortcomings. One example is the Medicaid payback provision. This provision declares that, upon the death of the beneficiary, the state in which the beneficiary lived may file a claim to all or a portion of the funds in the account equal to the amount the state spent on the beneficiary through their state Medicaid program.
This means that any money left in the account after the beneficiary passes could be required to be paid to the state to cover government benefits received on the beneficiary’s behalf. For families with more than one special needs child, this provision can have a significant impact, as families may be unable to pass on the remaining funds in the ABLE account to cover the disability-related needs of other children within the household. There is, however, hope that since the law is relatively new (passed in 2014), future legislative sessions will offer opportunities for improvement.
If you have more specific questions about ABLE accounts than were covered in this post or would like information about the services that I provide, you can schedule a complimentary meeting here.