Special Needs Planning: What is an ABLE Account?
Living with a disability is generally associated with significant extra costs. The Achieving a Better Life Experience (ABLE) Act allows people with disabilities who became disabled before they turned 26-years-old to set aside up to $15,000 a year in tax-free savings account without affecting their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). This money can come from the individual with the disability or anyone else who may wish to give him/her money. Unlike direct gifts, transfers to ABLE accounts do not affect SSI or Medicaid benefits. ABLE accounts are eligible provide tax-free distributions for the account beneficiary’s care.1
How does an ABLE account fit into an overall strategy?
From one individual or family to another, the needs and requirements of putting together a successful financial road map can be drastically different. When it comes to planning for an individual with special needs, this is especially true. There should be a well thought out strategy in place to help ensure the individual with special needs has the resources in place should the family no longer be able to provide support. Individuals with special needs and their families may incur significant additional costs associated with healthcare, nursing care, and other support services.
Not only are costs higher, but an individual with disabilities who has more than $2,000 in assets is not eligible for federal benefits. You read that correctly, a $2,000 net worth effectively cuts off federal eligibility for an individual with special needs.2 In light of that, historical techniques that might go into planning for an individual with special needs could include the creation of a special needs trust or having specific documentation that accompanies estate planning documents pertaining to everyday needs of the individual (think everyday living items like favorite desert, favorite TV show, hearing aids or eye glasses, etc.). The ABLE account was created to offer a better quality of life for those with qualifying disabilities.
How much can I save in a ABLE account?
The total annual contributions into an ABLE account by all contributors combined, including family, friends and the beneficiary themselves, for any given tax year is $15,000. The amount may be adjusted periodically to account for inflation. Minimums for the Texas ABLE account are only $50 with $25 minimum subsequent contributions. The lifetime maximum allowable account balance is $370,000.
Once the gifts are made to the account, they are considered a completed gift as the beneficiary is technically the owner of the account. While these contributions are not tax deductible at the federal level, earnings grow tax-deferred with distributions made for the beneficiary tax-free.
Are there any drawbacks to an ABLE account?
ABLE accounts have some relatively strict rules on who can be a beneficiary, how much can be contributed annually, and what balances can be kept in the account to still ensure public benefits for the beneficiary. In order to be a legal beneficiary of an ABLE account, the individual in question must have become disabled prior to his or her 26th birthday. Individuals older than 26 can still open accounts, but the disability must have commenced prior to turning 26. If the ABLE Age Adjustment Act3 passes the US House and Senate, the eligibility age would increase from 26 to 46.
Even though the lifetime maximum allowable balance is $370,000, funding ABLE accounts is also subject to rules intended to limit the ability of individuals to compile large amounts of savings. First, as previously mentioned, ABLE accounts can only receive contributions of $15,000 from all sources for a given year.4 Second, once ABLE account balances reach $100,000, Medicaid benefits for beneficiaries is cut off until the balance of the account falls back below $100,000.5 Third, and perhaps most importantly, ABLE accounts may be subject to “clawback” rules, meaning once an account beneficiary that was receiving Medicaid assistance passes away, any funds left in an ABLE account may be subject to claims by state government for reimbursement of Medicaid benefits received. However, even with these drawbacks, the greatest benefit of an ABLE account is that it allows you to accumulate more than $2,000 in assets without losing out on federally funded means tested benefits. This includes SSI and Medicaid. Funds in an ABLE account are not taken into consideration when determining eligibility for these types of programs.
How do I set up an ABLE account?
Although the federal tax code allows for ABLE accounts, it's up to each state to actually set up and administer the programs—just as the states administer 529 programs. When you contribute money to 529 plans, the state invests the money on your behalf. Unlike with a typical IRA or 401K, you can't dictate how the money is invested outside of making choices as to how aggressive or conservative the money is to be invested, within limits. For more information about the Texas ABLE account, check out https://www.texasable.org/ or to see the available investment options see https://www.texasable.org/investments/#investment-options.
Given the wide spectrum of rules associated with ABLE accounts, it may be wise to consult a tax professional or Gap Financial to help ensure the ABLE account is an appropriate fit for your particular situation.
1 http://www.ablenrc.org/about/what-are-able-accounts
2 http://www.ablenrc.org/about/what-are-able-accounts
3 https://www.congress.gov/bill/115th-congress/senate-bill/817
4 https://www.texasable.org/about/#program-disclosure-statement
5 https://secure.ssa.gov/poms.nsf/lnx/0501130740
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a fiduciary financial planner, accountant, and/or legal counsel for advice for your specific situation.