Wednesday, November 18, 2015

Elder Law: The ABLE Account - A New Planning Tool for Persons with Disabilities

By Elizabeth P. Allen

On December 19, 2014, The Achieving a Better Life Experience Act of 2014 became law. Its purpose is to create tax-free investment accounts to be used by persons with disabilities for qualified disability expenses while allowing those persons to maintain eligibility for means-tested benefits. The program is modeled loosely after current section 529 savings accounts. States have the option of establishing their own ABLE programs or contracting with another state that has established one.

To be eligible for an ABLE account, an individual must be severely disabled - based on either receipt of SSI or SSDI benefits or certification by physician of a marked and severe functional limitation - before turning 26. The individual must also be a resident of the state in which he or she has the account. Individuals are limited to one ABLE account, and the total amount of annual contributions by all individuals to any one account is the yearly gift tax limit. The aggregate contributions total to an ABLE account is subject to an overall limit matching the state limit for section 529 accounts.

Contributions into an ABLE account can be made by any person, including the eligible individual. Income earned by the accounts will not be taxed. Account withdrawals, including portions attributable to investment earnings generated by the account, for qualified expenses will not be taxable either. For SSI purposes, the first $100,000 in the account balance will not count as a resource; the same is true for account withdrawals. If the balance is in excess of $100,000, the eligible individual will lose SSI benefits until brought back under the $100,000 amount. ABLE account balances and withdrawals will be excluded for the purpose of Medicaid and other benefit programs. However, if the account balance is in excess of the overall maximum allowed, then the individual will lose Medicaid benefits. If withdrawals are used other than for qualified disability expenses, penalties and tax will be imposed.

Qualified disability expenses are defined as “any expenses made for the designated beneficiary related to their disability,” including for 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; and funeral and burial expenses.

The act does include a Medicaid payback provision. In the event the qualified beneficiary dies with remaining assets in an ABLE account, the assets in the ABLE account are first distributed to any state Medicaid plan that provided medical assistance to the designated beneficiary. The amount of any such Medicaid payback is calculated based on amounts paid by Medicaid after the creation of the ABLE account.

The IRS recently released proposed regulations for the ABLE Act. On May 21, Florida enacted the Florida ABLE Act. It is still in the implementation stage. The program will be administered by Florida ABLE, Inc., and the Florida ABLE Trust Fund will hold account moneys.

An ABLE account will be a new planning tool to address the need for sustainable funding and options for persons with disabilities. However, it has its pros and cons like any other planning tool already available. An analysis will still be needed to know when an ABLE account is the right tool, and when other options, such as a special needs trust, are more appropriate.