The ABLE Account: Achieving a Better Life Experience
In 2014, Congress passed the “Stephen Beck Jr., Achieving a Better Life Experience Act,” also called the ABLE Act. The ABLE Act’s passing was a great day for those with special needs and their advocates. It brought to light the significant costs of raising a child with special needs and disabilities and enacted unique tax advantages that were previously unavailable. Families could finally establish a savings account that didn’t negatively affect their precious government benefits, while also receiving highly valuable tax benefits.
How do ABLE accounts work, and how are they different than the more well-known special needs trust (SNT)? The first thing to understand is that there are three different types of SNTs:
- A first party SNT
- A pooled SNT
- A third party SNT
For simplicity, this article will compare the ABLE account to the most common type of SNT: the third party SNT. For all SNT references below, be aware that they apply to a third party SNT, specifically.
To be eligible for an ABLE account, the onset of an individual’s disability must have been prior to the age of 26 (in 2026, this increases to age 46, a huge win for the special needs community). There is no age requirement for an SNT. While a person can only have one ABLE account, they could, in theory, have an unlimited number of SNTs. The person with the disability and their guardian or agent can both control the ABLE account. In contrast, the SNT can be controlled by anyone other than the person with the disability; thus, the aptly named third party SNT.
There is no limit to the amount that can be contributed to an SNT. With an ABLE account, the annual limit is $17,000 in 2023, equal to the current IRS gift exemption amount. A provision to the ABLE Act called “ABLE to WORK” passed as part of the Tax Cuts and Jobs Act of 2017. It permits an additional $13,590 (in 2023) to be contributed if the individual is employed and has gross income up to that level; the limit is the lesser of $13,590 or the total gross income for a given year. Just as the Tax Cuts and Jobs Act of 2017 is set to expire in 2025, so too is the “ABLE to WORK” provision.
There is no cap on an SNT’s account balance; however, to ensure Supplemental Security Income (SSI) benefits remain intact, the highest balance that can be in an ABLE account is $100,000. The balance can be higher than $100,000, but SSI benefits will be immediately suspended until the balance falls below $100,000 again. Other government benefits like Social Security Disability Insurance (SSDI) and Medicaid are unaffected by this.
Although a third-party SNT has no limitations on how and where funds can be used, it may not be the best idea to use the funds without a plan. When an SNT pays for things like food or shelter, this is considered a specific type of income called in-kind support and maintenance (ISM). SSI treats ISM differently, and it could lead to a reduction or elimination in SSI and Medicaid benefits. That’s where the ABLE account steps in. In stark contrast to an SNT, an ABLE account can only be spent on a government-defined list of Qualified Disability Expenses (QDEs), which, for all intents and purposes, is food and shelter. Although not exhaustive, the U.S. Department of the Treasury indicates that this list can be interpreted to include these basic living expenses:
- Health and wellness
- Legal fees
- Financial management, including ABLE account oversight and monitoring
- Employment training and support
- Assistive technologies and personal support devices
- Funeral and burial expenses
The ABLE can be funded gift-tax free where the SNT cannot. One of the key benefits of having an ABLE account instead of or in addition to an SNT is that earnings and withdrawals are tax-free when used to appropriately on the above listed QDEs. Earnings in a third-party SNT are taxed at the highest tax rate. Therefore, it might make sense to use the ABLE account to cover near-term expenses for everyday living, and use the SNT for travel, other quality-of-life benefits, and long-term growth.
Upon the passing of the person with the disability, a third-party SNT will be immediately distributed to the specified heirs, skipping Medicaid recovery (also called Medicaid payback). With ABLE accounts, federal law allows state Medicaid agencies to recover benefits upon an individual’s death, which could potentially diminish, or even eliminate, the balance in the account. Only after any outstanding QDEs (including funeral and burial expenses) and Medicare are paid will the remaining assets be passed to the account owner’s estate.
When investing an SNT, the trustee is free to invest it however they wish, so long as the risk they’re taking aligns with what is specified within the SNT. With an ABLE account, this can vary from state to state. It’s best to check with your state’s ABLE guidelines to see what your specific investment options are. However, it’s safe to say that most plans offer a variety of risk tolerances; your job would be to choose the appropriate risk level for your family’s situation. ABLE accounts also offer a checking account feature with a debit card and check writing, if you desire.
A financial advisor can assist you in determining what an appropriate level of risk is for accounts like these. Determining a level of risk for your own retirement accounts can be daunting; imagine how daunting it can be responsibly investing an account that isn’t for your own benefit. Having a financial professional who understands these types of accounts, your overall situation, and your unique needs can help make some of these complex decisions much more manageable.
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