529 Able Accounts

A New Tool in the Estate Planner’s Toolbox, but Not a Replacement for Special Needs Trusts

UPDATE: March 23, 2017

The California ABLE board has issued a Request for Proposals to hire an investment consultant to manage the state’s ABLE program accounts. The Request for Proposals envisions the launch of CalABLE accounts in October 2017.

Note: Like all government projects, this deadline may shift. Drobny Law Offices, Inc. will keep our clients informed as things develop.


The Achieving a Better Life Experience (ABLE) Act was passed by overwhelming majorities in both the House and Senate and was signed into law by President Obama on December 19, 2014. The ABLE act added Section 529A to the Internal Revenue Code to create a specialized savings account for persons with disabilities. See 29 U.S.C. § 529A.

Some people may be familiar with existing 529 plans as a savings vehicle for college. Traditional 529 accounts allow contributions to grow tax-free, so long as distributions are made to pay for qualified educational expenses, such as college tuition. The ABLE act authorizes states to create similar tax-preferred savings accounts (“529A or ABLE accounts”), but for individuals with disabilities.

California is still in the process of implementing the program. California’s ABLE program is expected to go on-line with qualified persons being able to open California ABLE accounts in the Fall of 2017.

Under the federal guidelines, to be eligible for an ABLE account, the owner of the account must have a disability that commenced before the owner’s 26th birthday. California’s ABLE program defines an eligible individual as one who has blindness or a disability as defined by the Social Security Administration before age 26. Such a person may then open an ABLE account.

Earnings on ABLE funds are tax-free if used for “qualified disability expenses” that are related to the eligible individual’s blindness or disability to include: 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.

The primary benefit to people with disabilities is that funds in ABLE accounts are not countable assets for the purpose of qualifying for means tested government benefits, such as Medi-Cal or SSI, which limit a person’s assets to $2,000. For ABLE account holders receiving SSI, their SSI benefits will be suspended if their ABLE exceeds $100,000 and reinstated if the balance falls below $100,000. For California ABLE account holders receiving Medi-Cal, their Medi-Cal benefits will be terminated if their ABLE account exceeds $371,000.

Anyone can contribute to an ABLE account, but total contributions to an ABLE account cannot exceed $14,000 per year. And, no, you cannot get around the contribution limit by opening up another ABLE account – an eligible person may only have one (1) ABLE account.

These ABLE accounts sound like a great way for the accumulation of assets for a disabled individual’s health, education, support, and maintenance beyond the $2,000 threshold for SSI, Medi-Cal, and other means tested government benefits. What are the potential drawbacks?

When an ABLE account holder dies, his or her ABLE account is not protected from Medi-Cal recovery. Unlike assets held in a properly drafted Special Needs Trust, any assets in an ABLE remaining after the account holder’s death will be seized by the state to pay for Medi-Cal benefits received. A properly drafted Special Needs Trust avoids this problem because assets in a Special Needs Trust are not owned by the Medi-Cal recipient, and are therefore protected from state seizure after the death of the beneficiary of the Special Needs Trust.

ABLE accounts fill a much needed gap between restricting an individual with special needs to a life of never being allowed to have more than $2,000 and being the beneficiary of a Special Needs Trust with significant held for their health, education, support, and maintenance. The current $2,000 asset cap was put in place in 1989, and has not been adjusted for inflation. In 1989, $2,000 had the same buying power as $3,840 does in 2016.

Back in the real world, the target demographic who would benefit most from having an ABLE account are likely to need more than $14,000 per year in assistance. Once again, a traditional Special Needs Trust may be a better option as such trusts can hold unlimited amounts of assets and may receive unlimited contributions from anyone other than the beneficiary.

Funds held in ABLE accounts may only be used for a very specific set of qualified disability expenses, otherwise distributions lose their tax advantaged status and are slammed with a 10% federal penalty and a 2.5% California state penalty. Furthermore, “qualified disability expenses” are subject to change at the whims of Congress. Funds held in a Special Needs Trust may be used for any expense. The only potential drawback is that certain distributions from a Special Needs Trust may reduce or eliminate SSI or Medi-Cal eligibility.

ABLE accounts do serve some utility in promoting self-sufficiency among people who benefit from SSI and Medi-Cal. If a recipient of those programs has an ABLE account, they need not worry about having more than $2,000 in assets and losing their public benefits. Having access to a savings account that does not count toward the overall asset limit would help otherwise disadvantaged people gain a sense of control over their personal economic situation.

While ABLE accounts are not a replacement for the time-tested Special Needs Trust, they are a useful addition to the estate planner’s toolbox and should not be overlooked when advising clients with beneficiaries who have special needs.

If you have questions regarding ABLE accounts and Special Needs Trusts, contact Associate Attorney Jacob C. Smith at (916) 419-2100.


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