529 ABLE Accounts

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

UPDATE: November 13, 2018

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. But, what about the child or grandchild who has special needs? The ABLE act authorizes states to create similar tax-preferred savings accounts (“529A or ABLE accounts”), but for individuals with disabilities and special needs.  The ABLE Act, however, authorizes much broader use of the funds than a 529 plan.

ABLE accounts were created under federal law, but they are a state run program.  Each state will have slightly different rules and regulations for ABLE accounts.  We are still waiting for the State of California to finalize the implementation of ABLE accounts in California.  The State of California has indicated that the goal for CalABLE to be open for business is by the end of 2018.  That means that qualified individuals will be able to open their own accounts in just a few months.  A brief fact sheet on CalABLE provide by the State of California can be found at here.

If you are thinking about opening an ABLE account, but do not want to wait for the State of California, you can open an ABLE account in another state that authorizes out of state residents to have an account. However, please remember that an individual can only have one ABLE account and each state program may have different pros and cons, depending on your particular situation. To compare state to state ABLE programs, visit: http://ablenrc.org/state_compare/.

Note: Drobny Law Offices, Inc. will update this article when CalABLE opens for business.

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. An eligible individual is 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 for a specific individual cannot exceed $15,000 per year in 2018. This amount will adjust for inflation annually. And, no, you cannot get around the contribution limit by opening up another ABLE account – an eligible person may only have one ABLE account.

In addition, two new Federal laws expanded the scope of the ABLE Act.  The ABLE to Work Act authorizes an employed ABLE beneficiary to contribute up to $12,140 per year of earnings into their ABLE account, or up to the $15,000 annual limit.  The ABLE Financial Planning Act allows money to be rolled over tax-free from a regular 529 plan to an ABLE account which effectively permits the beneficiary to use the money for non-tuition related expenses.

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 Third Party 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 Third Party 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.

The target demographic who would benefit most from having an ABLE account is likely to need more than $15,000 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 supplement 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 Attorney Mark S. Drobny or G. Kevin Lachona, who assisted in updating this article at (916) 419-2100.

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