This article was written by Heath Burch, CFPÂ®, with The Special Needs Planning Center. To learn more about ABLE accounts and how they may fit into your special needs plan, contact the SNPC at 816.741.1100 orÂ firstname.lastname@example.org.
Eight years after first being proposed, The Achieving a Better Life Experience (ABLE) Act has finally passed both the House and Senate. With President Obamaâ€™s signing of the law on December 19th, individuals and families with special needs will now have a powerful new tax-free savings tool to help support individuals with disabilities.
The act is designed to provide individuals with disabilities and their families the ability to create a savings account to pay for disability related expenses, but do so in a way that will not be considered against the highly restrictive $2,000 asset limit placed on individuals receiving SSI (supplemental security income) or Medicaid. While ABLE seems to be relatively straight forward, letâ€™s analyze how these accounts may be utilized by families.
Achieving a Better Life Experience Act of 2014 or the ABLE Act of 2014 -Â Title I: Qualified ABLE ProgramsÂ – (Sec. 101) States as the purposes of this title to: (1) encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life; and (2) provide secure funding for disability-related expenses of beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, title XVI (Supplemental Security Income) and title XIX (Medicaid) of the Social Security Act, the beneficiary’s employment, and other sources.
The most closely related financial tool we can relate ABLE to appears to be a section 529 college savings plan. Similar to the 529, ABLE accounts are to be made available in each state and one of their best features will be that both earnings in the account and distributions from the account may be tax-free. In the case of ABLE accounts, the distributions will be tax-free as long as the distributions are for qualified disability expenses.
Section 102 of the Act defines these to include the following: education, housing transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.
Again similar to 529â€™s and other tax-favored investment accounts, distributions determined to be not used for qualified expenses would have a 10% tax imposed. These distributions will be required to be reported, assumed annually, subjecting the accounts to oversight to maintain the tax-favored nature of distributions.
ABLE accounts will allow for contributions from any source â€“ the person with a disability, parents, family members or others. The account can receive annual contributions up to the annual gift-tax exemption, scheduled to be $14,000 in 2015. These contributions would be made with after-tax dollars, meaning they do not provide a tax deduction on contributions that some tax-favored accounts do. While multiple people can fund an ABLE account, each account will be allowed only one beneficiary.
The account can grow to any balance, but once the value exceeds $100,000 SSI income benefits (the up to $733 monthly income in 2015) would be suspended. A very important factor to note though is the ability to maintain eligibility for Medicaid, even if SSI income ceases. These assets will be able to be rolled over into another ABLE account for the beneficiary or a related family member, allowing for the consolidation of accounts or the ability to provide for another family member with a disability. However, any assets remaining in the account at the beneficiaryâ€™s death would be used to reimburse Medicaid for payments made benefitting the beneficiary during their lifetime prior to any remaining assetsy could pass on to heirs. While this is an important factor to consider that will warrant ongoing monitoring of the account, we donâ€™t believe this will prove to be a deterrent to opening the account in most cases.
Noted in the first section of the law the ABLE account is defined to supplement, but not supplant, benefits provided through private insurance, SSI and Medicaid. If this sounds familiar, this is the same language we see in a well drafted Supplemental Needs, or Special Needs, Trust. This leads us to one of the first questions we get when discussing ABLE with families: Do ABLE accounts replace the need for a special needs trust for a family providing for the future care of a loved one with special needs. In short, no! While this could provide an alternative to funding a self-settled, (d)(4)(a) trust (often referred to as a Medicaid payback trust) in some cases, especially for amounts under the ABLE account annual contribution limit, in general the need for a special needs trust as a part of a comprehensive estate plan will continue for most of the families we serve. In our opinion, pairing both an ABLE account and a well drafted estate plan to include a special needs trust is the best way to provide for ongoing care expenses.
So whatâ€™s next? For now we wait, while implementation is expected in 2015 the states have yet to have time to develop the roll out of the accounts. We may be surprised and have the ability to open accounts early in 2015, but expect it to be later in the year before implementation is ready. Once these accounts are available each family will want to sit and determine if an ABLE account is appropriate, and if so how it fits into a fully developed special needs plan.