The ABLE Act
The ABLE Act (Achieving a Better Life Experience) was signed by the President on December 19, 2014. Despite much delay, these accounts are finally available to individuals with disabilities who reside in any state. Ten states currently offer these programs.
The ABLE Act allows disabled individuals to hold more than $2,000 in specially designated accounts without losing their public benefits. ABLE accounts are similar to 529 college accounts which can grow tax free if the funds are used for educational purposes. ABLE accounts can also grow tax free if they are used for qualified “disability expenses”. The ABLE Act is an important step forward for disabled individuals as it provides for the possibility of some financial independence. Many public benefit programs such as Medicaid and Supplemental Security Income (SSI) have very rigid financial eligibility limits and if a recipient exceeds these limits even by a small amount, they may be ineligible for the program. After years of lobbying, Congress has finally recognized that disabled individuals and their families should be allowed to set aside funds that can be used to supplement what the disabled person would otherwise be entitled to receive through public benefits. Until the ABLE Act, our only option to accomplish our clients’ goals of protecting assets while preserving benefits was to draft a supplemental needs trust. The ABLE Act provides a simple way for clients to accomplish the same objective while avoiding the cost of drafting a trust.
It is important to note that each State ABLE program is expected to be slightly different, so it is worth “shopping around” to find the best program. A new website is launching to help families compare different ABLE programs. The website will compare approximately 20 variables to help families chose the right program for them. For more information on this new website, check out this article on the Disability Scoop: https://www.disabilityscoop.com/2016/03/03/new-able-account-clearinghouse/21993/.
In order to open an ABLE account, you must establish that you are blind or disabled under the Social Security Act. The individual must establish that their disability began before age 26. If your disability ensues after age 26, you cannot take advantage of these accounts. Any person can contribute to an ABLE account. A “person” includes individuals, trusts, estates, partnerships, associations, companies or corporations.
The ABLE Act has many limitations that should be kept in mind. First, each eligible individual may only have one ABLE account. Second, the annual cumulative contribution limit to an ABLE account is capped at $14,000 (including contributions by the disabled person or by anyone else for their benefit). Also, contributions must be in cash unless it is an in-kind rollover. Third, if the account balance exceeds $100,000 the beneficiary will lose their SSI eligibility. However, the beneficiary will still retain their Medicaid eligibility. Perhaps the most important limitation is that any funds remaining in the account after the death of the beneficiary must be paid to the State as reimbursement for benefits received.
Once an account is set up, distributions may be made for any “Qualified Disability Expense” without fear of losing other benefits. Qualified Disability Expenses include expenses related to the individual’s disability. For example, education, housing, transportation, employment training, legal fees, financial management services, basic living services and health expenses all qualify. Any distributions that are not deemed to be qualified will be subject to income tax and a 10 percent penalty.
A program shall not be treated as a qualified ABLE program unless it provides a separate accounting for each designated beneficiary. Also, the program must provide that any beneficiary under such program direct the investment of the program no more than two times in any calendar year. ABLE account programs will be established by individual states.
The ABLE Act is a helpful tool that can be used to promote financial independence. These accounts allow disabled individuals to focus on saving and avoid the need to immediately spend down their assets. However, the simplest option is not always the best option. Unfortunately, as described above, the ABLE Act has some limitations and potential pitfalls that may make it a less than ideal option. For anyone who wants to provide for a disabled family member or friend, a supplemental needs trust remains a more versatile tool if the assets involved justify the legal fees involved. Unlike an ABLE account, supplemental needs trusts allow unlimited contributions without affecting the disabled individual’s eligibility for public benefits. Also, upon the death of the beneficiary, the balance of an ABLE account must be paid to the state to reimburse for benefits provided. This is not the case with a supplemental needs trust unless the beneficiary funded the trust with their own savings. It is important to speak with an elder law attorney when deciding which option is best for you.
You can also visit the link below to the Social Security website for even more detailed information on the ABLE Act.