Brendan J. King
The ABLE Act, aka Achieving a Better Life Experience Act, introduced in the 113th Congress by a bipartisan group of Congressional leaders, was signed into law by the President on December 19, 2014.
The law amends a section of the tax code allowing for the creation of tax-advantaged savings accounts for individuals with disabilities and their families. This law will allow those with disabilities to open special accounts where they can save up to $100,000 without risking eligibility for SSI and other government programs. Additionally, individuals will be able to keep Medicaid coverage no matter how much money is accrued in their accounts. The final version of the ABLE Act limits eligibility to individuals with significant disabilities that begin before 26 years of age.
The new law is modeled after the 529 college savings plans and interest earned will be tax-free. Contributions can be made from the disabled individual’s own funds or by third parties. Funds may be withdrawn tax-free if used for a variety of qualifying expenditures including medical and dental care, education, community-based support, employment training, assistive technology, housing and transportation.
Regulations are being developed to guide states as they create their own programs. The ABLE account could be a viable option in addition to a Trust or as a stand-alone fund. An ABLE account is different from a special needs or pooled trust, in that it can be controlled directly by the disabled owner/beneficiary. The cost is lower than traditional trust options, but limits on account totals and contributions make it likely that these accounts will be most useful as a companion to trust planning, or as a stand-alone tool for smaller amounts of resources. Additionally, the age limitations on eligibility will make them inappropriate for some disabled individuals.
An important trap for the unwary is the mandated payback feature of ABLE accounts, requiring funds left in an account on the owner/beneficiary’s death to first be to reimburse the government for benefits received during the beneficiary’s lifetime. For third parties (parents, grandparents and others) looking to benefit a disabled loved one with lifetime gifts or through inheritance, third party special needs trusts remain a more attractive option because any remaining funds upon the deceased beneficiary’s death can be left to other beneficiaries and escape a payback requirement.
We will track implementation of the ABLE regulations in Massachusetts and keep you informed of its status during the year.