An Overview of the ABLE Act
What follows is an abbreviated version of our article that appeared in our firm’s most recent newsletter, the ElderCounselor.
Late in 2014, the ABLE (“Achieving a Better Life Experience”) Act was signed into law. The law is aimed at achieving a manner in which those with special needs can save money without losing needs based public benefits such as SSI or Medicaid. While an ABLE account does not replace other tools, like special needs trusts, it does add an option for individuals with special needs.
The ABLE Act is a federal law that allows states to establish a savings program for persons with disabilities. Montana has not yet implemented the program and we will need to continue to monitor its application in Montana. The program is modeled after the 529 savings accounts. ABLE accounts may be used to accumulate savings, with certain restrictions, for use by a beneficiary with a disability. An ABLE account may be established by any contributor (a parent, friend, family member or the person with a disability) for the benefit of a beneficiary of any age so long as the beneficiary can establish that he or she met the disability criteria prior to age 26.
The Act imposes limits as to the amount of savings that can be held in an ABLE account. The first such limitation deals with the annual total contribution amount, which may not exceed the annual gift-tax exclusion amount (currently $14,000). This is not a per person contribution limit; it is the total amount that can be contributed to the account by all contributors. In addition, ABLE accounts may only accumulate aggregate contributions up to the state’s limit on qualified tuition programs (i.e. 529 accounts), which in Montana currently is $396,000. Finally, SSI exempts only the first $100,000 of an ABLE account. Therefore, if an individual receives SSI, his or her ABLE account may not exceed $100,000 and he/she may have other assets up to only $2,000. Otherwise, the individual will become ineligible to continue receiving SSI, but can remain eligible for Medicaid.
It is important to note that the ABLE account is a “Medicaid Payback” account. This means that the Act requires a provision in the account that upon the death of the beneficiary of the account, Medicaid payments made on behalf of the beneficiary subsequent to the establishment of the ABLE account must be reimbursed with any remaining funds.
ABLE accounts have tax benefits similar to 529 accounts. Qualified distributions from the account are not counted as taxable to either the contributor or the beneficiary. Qualified distributions include expenses paid for the benefit of the beneficiary related to: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and any other expenses approved by the Secretary of Treasury. In addition, earnings on the ABLE account are not taxable to the contributor or to the beneficiary.
A person receiving needs-based government benefits often has a dilemma when it comes to saving, whether for education or for unexpected events, all while maintaining public benefits such as SSI. In order to receive SSI, a person with a disability must have assets under $2,000. The ABLE Act makes saving possible…up to a point. Now the individual can remain on SSI and save a modest amount in an ABLE account (up to $14,000 per year). Persons with disabilities who are employed may want to utilize an ABLE account to save a portion of their income while remaining qualified for SSI. In addition, families may want to contribute to an ABLE account for their loved ones with disabilities in smaller increments. These same families may also desire to use other tools available such as Special Needs Trusts, which may be more flexible. On the other hand, because of the limitations the ABLE account will not be useful, for instance, for people who have become disabled due to an accident and who are receiving a judgment or settlement for a significant amount, or for a person with special needs who is receiving a large inheritance.
Every tool has its use and the ABLE account, when implemented by Montana, will be no exception. We can walk you through the decision process of determining when it is an appropriate option for you or your loved one and when it is not.