ABLE Accounts: A Savings Vehicle for Those with Special Needs
Do you have a loved one who is disabled or who has special needs? Many times individuals with special needs rely on public benefits such as Supplemental Security Income (SSI), Medicaid, and other programs to help with living expenses. In order to retain eligibility for such benefits, the individual’s cash and investment assets may not exceed $2,000. This restriction often makes it difficult for special needs individuals to achieve a greater quality of life and financial independence.
A relatively new savings vehicle, an ABLE account (which stands for Achieving a Better Life Experience), can help special needs individuals set aside monies for qualified disability expenses while minimizing the impact of these assets (and subsequent distributions) on their eligibility for means-tested government benefits. ABLE accounts can also be a useful tax-advantaged savings vehicle for disabled individuals, even if they are not eligible for public benefits. ABLE accounts are state-sponsored savings vehicles that provide tax-deferred growth and tax-free withdrawals for qualified disability expenses. Monies in an ABLE account generally do not count toward asset or income limits when qualifying for means-tested government benefits and can help special needs individuals achieve greater financial security.
Let’s review some key features of ABLE accounts to better understand how these can benefit individuals with special needs.
To be eligible to open an ABLE account, an individual must have been diagnosed with disability prior to age 26, and either receive Social Security Disability Insurance (SSDI) or SSI benefits OR have a disability certification document from a physician.
The owner of the ABLE account is always the disabled individual, but another person may serve as power of attorney (POA). Consider establishing a power of attorney, even if the disabled individual has capacity, to assist in managing the ABLE account. In fact, many states have POA forms available on their ABLE plan website.
Any person may contribute to an ABLE account, including an individual, trust, estate, partnership, etc. Annual contributions are limited to the annual gift tax exclusion amount, currently $15,000, plus a potential additional amount if the beneficiary is employed. Eligible individuals are allowed to have only one ABLE account. States may offer resident tax benefits for contributions. If state tax benefits are available, consider using your resident state’s ABLE plan. A 529 college savings plan may also be rolled over to an ABLE account.
If the ABLE account balance grows to more than $100,000, SSI eligibility (but not Medicaid) may be temporarily suspended. Also, upon the owner’s death, the state may claim remaining ABLE assets to repay any Medicaid assistance received. This claw-back may occur regardless of the size of the ABLE account. If the owner is eligible for SSI and/or Medicaid, then an ABLE account is generally not a good savings vehicle for a large sum of money. Consider maintaining only a small balance in the ABLE account if Medicaid payback is a concern.
Withdrawals from an ABLE account are tax-free if used for qualified disability expenses such as housing costs, home improvement, transportation, health care, personal assistance, assistive technology, education, or employment training. Keep good records of expenses and distributions from ABLE accounts.
Many ABLE account providers offer a debit card or prepaid card for convenient distributions. The features of these cards, and how they work, can vary from provider to provider. Make sure to understand these options when selecting an ABLE provider.
Other ABLE Account Considerations
In some cases it may make sense for an ABLE account to be used in tandem with a Special or Supplemental Needs Trust. For example, payments for housing from a Special or Supplemental Needs Trust count as income to the beneficiary and can impact eligibility for federal benefits. On the other hand, distributions from an ABLE account for housing generally do not count as income to the owner, nor do such distributions negatively impact eligibility for means-tested benefits. Certain restrictions apply, so it is important to consult with a qualified attorney when utilizing both an ABLE account and a Special Needs Trust.
Consult with a qualified special needs attorney to determine the most appropriate funding vehicles and strategy for each individual’s situation.
Source: ABLE National Resource Center
This is intended for informational purposes only and should not be construed as personalized investment or financial advice.