The passage of the U.S. Achieving a Better Life Experience Act of 2014 (ABLE) enabled millions of disabled Americans to save money without losing means-based benefits, such as Supplemental Security Income (SSI) and Medi-Cal.
Currently, anyone with more than $2,000 in countable assets is ineligible for most means-based programs. Prior to ABLE, it was impossible to save funds for larger expenses, such as post-secondary education. Now individuals who are disabled before age 26 may open savings accounts without losing that eligibility.
However, the tax-advantaged accounts have some restrictions. For example, contributions are limited to $15,000 a year up to $100,000 total. If the saver is employed and does not have an employer-sponsored retirement plan, that limit is increased to $15,000 plus the lesser of the federal poverty line for a one-person household ($12,490) or the designated beneficiary’s annual compensation.
Monies collected in ABLE accounts are not subject to state or federal income tax as long as they are spent on Qualified Disability Expenses (QDE). QDEs include basic living expenses, tuition for preschool through post-secondary education, the purchase of and/or expenses for a primary residence, rent, property taxes, utilities, medical and dental care, assistive technology, transportation, and housing.
Experts say ABLE accounts provide more financial control for disabled beneficiaries than a Special Needs Trust (SNT) or a Pooled Income Trust (PIT). A Special Needs Trust permits a beneficiary to enjoy the use of property that is held in the trust, without impacting eligibility for needs-based benefits. A Pooled Income Trust holds monthly income in trust for living expenses and supplemental needs, also preserving an individual’s eligibility for means-based programs.
Whether an ABLE account is an appropriate financial tool depends on individual needs and circumstances. For example, the advantages of an ABLE account include:
- Unlike a trust, which requires the appointment of a trustee, qualified individuals can set up, fund, and manage ABLE accounts without the oversight or approval of others.
- Savers can freely move funds between accounts, making it easier to access money when needed.
- Funds deposited into ABLE accounts grow tax-free and are not subject to gift tax restrictions.
- ABLE accounts can be set up online and do not require consultation with a legal or tax adviser.
- Only individuals who have developed a disability prior to age 26 are eligible for ABLE accounts. In contrast, the age at which an individual develops a disability has no bearing on establishing a special needs or pooled trust. (Currently, legislation is pending to increase the age limit to 46.)
- Handing control of an ABLE account over to a disabled individual could open them up to scams and fraud. It is important that the account holder have an understanding of how to effectively manage a financial account. With a trust, the trustee manages the funds and has a legal obligation to safeguard them.
- Generally, contributions to ABLE accounts are limited to $15,000 a year or $100,000 in total. There are no limitations on the size of contributions to a special needs or pooled income trust. However, gift taxes may apply.
- If an ABLE account beneficiary dies, the remaining funds must first be used to reimburse Medicaid and then pass through probate for distribution to appointed heirs. Funds remaining in a trust pass directly to designated heirs. No Medicaid payback is required.
Experts say there are five practical uses for ABLE accounts:
- As a receptacle for Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. These accounts are intended solely for minor children. When a child reaches the age of majority, that account becomes countable income for means-based programs. Depositing those funds in an ABLE account will ensure continued eligibility.
- As an income shield. When child support, alimony, or earned wages are deposited in an ABLE account, they will not be counted as income. Deposits made into an ABLE account are also allowed to accumulate without penalty.
- As a substitute for a Special Needs Trust. When a beneficiary is expected to receive a small settlement, award, inheritance, or gift, the creation of an ABLE account can negate the need for a Special Needs Trust. For example, if an individual receives a settlement of $100,000, $15,000 can be immediately deposited into an ABLE account. The remainder could be used to purchase a structured annuity, which continues to fund that account over a period of time, within the allowable limits.
- As a way to provide a disabled adult with financial control. In most cases, the ABLE account is managed and controlled by the intended beneficiary. It provides beneficiaries with the freedom to make their own financial decisions, increasing their independence. In contrast, monies contained within a trust are managed by a trustee, who must approve each expenditure.
- As a way to pay household expenses without triggering SSI’s “in-kind support and maintenance (ISM) penalty.” When a third-party, including a Special Needs Trust, pays for living expenses, SSI considers those payments to be countable income. They are “in-kind support and maintenance.” When the same expenses are paid from an ABLE account, that penalty is not applied.
An ABLE account is only one of the tools available when crafting a financial strategy for a disabled child or adult. It can be used alone or in conjunction with other tools, such as a Special Needs Trust. To determine the best approach, contact a special needs planner. They can provide insight on how specific financial strategies impact eligibility for government assistance programs and assist in creating a financial strategy that best meets individual needs.