Although the Achieving a Better Life Experience Act (or ABLE Act) was signed into law on December 19, 2014, many states have been waiting to offer ABLE accounts authorized by the Act until the IRS published regulations. The IRS just published proposed regulations last week for these ABLE accounts. The New Jersey legislature has proposed legislation pending that would create ABLE accounts in the state.
The ABLE Act allows individuals to utilize a tax-free, state-based private savings account for the care of disabled beneficiaries, similar to a 529 plan for education expenses. The ABLE account can be used to supplement government benefits for certain expenses while not disqualifying such individual from government benefits. Similar to 529 plans, income earned by the accounts will not be taxed. Distributions can only be made for “qualified disability expenses.” This term has yet to be defined and may differ from state to state.
The beneficiary of an ABLE Account must have had an onset of a disability prior to turning age 26, however, so long as this requirement is met, the individual establishing the account can be over the age of 26. If an individual’s onset of disability was prior to age 26, and if such individual is already receiving benefits under SSI or SSDI, then he or she is automatically eligible to establish an ABLE account. If a person with a disability is not receiving SSI or SSDI, then he or she would need to undergo a certification process in order to open an ABLE account.
For persons with disabilities who are receiving SSI or Medicaid, the first $100,000 held in an ABLE account will not be counted as part of the $2,000 resource limitation. If an ABLE account exceeds $100,000, the beneficiary will no longer be eligible for SSI but will continue to be eligible for Medicaid. If distributions are made from the account for expenses other than “qualified disability expenses” then the account will be a countable resource and will disqualify the beneficiary from both SSI and Medicaid.
Unlike a First Party Special Needs Trust, the beneficiary or “eligible individual” can set up the account himself or herself. An individual can only have one ABLE account; however there is no limit to the number of people that can contribute to the account. Like a First Party Special Needs Trust, at the beneficiary’s death, the state can recoup the balance of the account to pay for expenses paid by Medicaid since the date the ABLE account was established. This provision makes the ABLE account a less attractive vehicle for gifts from third parties. We recommend that anyone wishing to gift substantial assets for the benefit of a disabled individual use a third party special needs trust, which does not have contribution limitations and does not require payback to Medicaid at the beneficiary’s death.
Like 529 plans, each state will determine the total amount that can be made to an ABLE account over its lifetime. Yearly contributions from any individual are limited to the annual exclusion amount for gifts, currently $14,000. This limitation applies even to beneficiaries who transfer their own assets to an ABLE account. This limits the usefulness of the accounts for situations where a beneficiary receives assets, such as a bequest or a settlement, in excess of $14,000.
An ABLE account is likely most useful for beneficiaries who are able to save some of their SSI payments and can accumulate assets over time in excess of $2,000. The excess can be contributed to an ABLE account and will allow the individual to continue to qualify for Medicaid. The ABLE account may also be a good tool for parents or other family members who want the disabled individual to be able to control some amount of assets while not disqualifying that individual from government benefits.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.
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