The Achieving a Better Life Experience (ABLE) Act may have been enacted nearly two years ago, but it is only within recent weeks that the specially earmarked savings accounts for disabled individuals envisioned by the plan have become a realistically available option. However, while ABLE accounts represent a valuable tax-preferred planning tool for disabled individuals, for most, relying on these vehicles alone to provide income can prove to be a mistake. Instead, the potential shortcomings of these accounts must be recognized in planning—as ABLE accounts should be viewed as only one piece of the puzzle in an overall savings plan to provide sufficient future income for an individual with special needs.
ABLE Account Rules
Under the pre-ABLE Act rules, disabled individuals were often discouraged from accumulating assets to meet future expenses because, absent the use of specifically designed trust vehicles, the individual would be disqualified from receiving Social Security and Medicaid benefits if he or she accumulated assets worth more than a mere $2,000.
The ABLE Act modified these rules to allow individuals to accumulate up to $100,000 in “ABLE accounts,” which are modeled after Section 529 college savings accounts, without becoming disqualified from receiving Social Security benefits (above and beyond the traditional $2,000 resource limit, so that a total of $102,000 can now be accumulated without risk of disqualification).
Once an individual’s assets exceed $102,000, Social Security benefits will be suspended until the account value is reduced to below the permissible level.
Medicaid benefits are subject to different rules and are not impacted regardless of how much the individual deposits into the ABLE account. Despite this, a Medicaid payback provision applies to require that any assets remaining in the account after the beneficiary’s death be used to repay Medicaid benefits provided to that individual.
In order to qualify as an ABLE account beneficiary, the individual must be blind, or diagnosed with a disability that causes severe limitations, before that individual reaches age 26. Individuals who are currently receiving Social Security disability benefits also qualify.
Currently, an individual may contribute up to $14,000 (the gift tax annual exclusion amount) to an ABLE account annually without gift tax liability. Only one ABLE account may be established per beneficiary, and distributions used to fund expenses related to the individual’s disability are received income tax-free. The definition of what constitutes an expense related to the disability is very broad and, for example, includes housing (rent, property taxes, a mortgage, etc.), education and legal expenses.
Despite this, ABLE accounts are currently available in only four states (Ohio, Nebraska, Tennessee and Florida), though it is anticipated that other states will begin offering their own ABLE accounts before the end of 2016. Fortunately, the disabled individual need not necessarily reside in the state where the account is established in order to take advantage of these accounts.
ABLE Accounts vs. Special Needs Trusts