These special accounts were created in 2014 to allow disabled individuals to have tax-free savings accounts. The accounts should be part of an overall plan for special needs individuals and their families.
President Obama signed the Achieving a Better Life Experience (ABLE) Act in 2014 as part of the Tax Increase Prevention Act of 2014. As reported in NJ101.5’s article, “Special accounts for the disabled,” these accounts allow qualified individuals with disabilities the opportunity to have tax-free savings accounts without putting their eligibility for Supplemental Security Income (SSI) and other means-tested government programs like Medicaid at risk. They can save as much as $100,000 in these accounts. It should be noted that if the account exceeds $100,000, then SSI benefits will be suspended, but Medicaid benefits continue.
The plan is modeled on 529 college savings plans, and interest earned on savings is free from income tax; however, contributions to the account will not be tax-deductible.
ABLE accounts are different from 529 plans in that the funds in these accounts can pay for education, health care, transportation, housing and some other similar expenses. To qualify, an individual has to have a disability that happened prior to age 26. Also, each individual with disabilities may have only one ABLE account, and the annual contributions are capped at the federal annual gift tax exclusion. That’s $14,000 this year.
Any funds that remain in the account when the account beneficiary dies must first be used to repay Medicaid for expenses incurred on behalf of the beneficiary.
States can offer these types of plans to people with disabilities, but they first must adopt regulations before financial institutions can offer the plans. Right now, Ohio is the only state in the country that currently offers such a plan, but other states’ residents can open an Ohio STABLE account.
The ABLE Act is a welcome and useful tool that provides special needs individuals and their families with another means of planning for the future, but its use requires careful consideration to the other planning methods. If there are first- and third-party special needs trusts already in place, those trusts need to be considered when contributions exceed the amounts allowed under the Act or when third parties don’t want their assets to be subject to a Medicaid payback. Thoughtful planning with a qualified attorney who is familiar with this area is necessary to achieve a family’s short-term and long-term goals.
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