The ABLE Account Program: Financial Planning for Family Members With a Disability
Financial planning for family members with a disability can be a challenging responsibility. Governmental assistance programs such as Supplemental Security Income (SSI) and Medicaid have strict eligibility requirements that make caring for loved ones difficult. For example, SSI has a limit of $2,000 in countable assets that a recipient can own which includes cash, bank accounts, investment and retirement accounts. An estimated 8 million people in the United States receives SSI disability benefits, but these benefits often do not cover all necessary expenses. Families and friends can fund special investment vehicles to assist in paying all necessary expenses.
Traditionally, Special Needs Trusts (SNT) have been used to shelter assets to avoid these restrictions and pay for certain expenses of the beneficiary. However, if distributions from an SNT are used to pay for housing expenses or food items, benefits from SSI are reduced. This is a substantial planning gap considering the high cost of housing and food in an overall budget. Fortunately, this planning gap has been addressed through the Achieving a Better Life Experience Act of 2014, or “ABLE Act”. The ABLE Act created the legal framework for ABLE Accounts, which are state administered tax-advantaged savings accounts. ABLE accounts are similar to 529 Plans for education, but used for individuals with disabilities and their families.
ABLE accounts are easier and less expensive to establish than SNTs and can be used to pay for certain Qualified Disability Expenses. ABLE accounts are not counted as an asset for SSI up to $100,000. Most importantly, Qualified Disability Expenses include the cost of housing and food, which are expenses that are not allowed to be paid out of SNTs as it would jeopardize government benefits. Opening an SNT in combination with an ABLE account is appropriate for beneficiaries with Non-Qualified Expenses, and beneficiaries receiving a large inheritance or settlement, thus, an SNT and an ABLE account are complementary to each other.
Similar to 529 Pans, income earned by ABLE accounts will not be taxed and they can be used either as a deposit account or invested in various portfolios dependent on your state’s plan. Accounts are limited to one per person and can be opened by the beneficiary, the beneficiary’s parents, an agent with power of attorney, or a conservator. Contributions to the account can be made by any person including the account beneficiary, family, friends, or the SNT. An annual contribution is limited to $16,000 per year from all sources combined. The $16,000 contribution amount is the same as the annual gift limit and is expected to increase over time. There is no Federal income tax deduction for contributions, but some states do offer income deductions. However, California does not offer a deduction.
To qualify for an ABLE account, an individual must have an onset of a disability before turning age 26. If you meet the age requirement and are receiving benefits under SSI or SSDI, you are eligible to open an ABLE account. If you are not a recipient of SSI or SSDI but meet the age of onset disability requirement, the National Resource Center for the ABLE Act states, “you could still be eligible to open an ABLE account if you meet Social Security’s definition and criteria regarding functional limitations and receive a letter of disability certification from a licensed physician,” (ABLE).
If the ABLE account balance exceeds $100,000, then a number of government benefits will be lost until the account is brought below $100,000. So, one strategy is to have the ABLE account partially funded over two or three calendar years. It can then grow over time from investment returns. If it gets close to $100,000, you or your successor can withdraw funds on behalf of the beneficiary to keep it from getting too large. If the ABLE account shrinks over time due to housing and other qualified withdrawals, then it can be replenished by contributing up to $16,000/year from a SNT or other sources.
If the beneficiary of an ABLE account passes away, Medicaid can claim funds out of the ABLE account for repayment. However, California passed a separate law (SB 218) that prohibits the state from taking money out of an ABLE account to reimburse the state for any prior Medi-Cal benefits. Not all states do this, so this is a benefit from having a California ABLE account. California ABLE accounts can be opened by out-of-state residents and also comes with a debit card, which makes withdrawals simple.
You can compare ABLE plans by state and find more general information here: https://www.ablenrc.org/compare-states/. Additional information on ABLE plan options and can be found by checking on your state plan.
Information about California’s ABLE account program is here: https://www.treasurer.ca.gov/able/.
How to open a California’s ABLE account and other information needed is here: https://calable.ca.gov.
Sources
- National Resource Center Achieving a Better Life Experience Act. “About ABLE Accounts” The ABLE National Resource Center, https://www.ablenrc.org/what-is-able/what-are-able-acounts/