ABLE Act - A New Planning Option for Families with Special Needs Children
Volume 5 • Issue 1 • January 2015
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will discuss a new planning option for special needs individuals known as the ABLE Act. If you are interested in learning more about the ideas and processes discussed in this newsletter please contact us for an initial consultation.
On December 19, 2014 President Obama signed H.R. 5771 into law. In addition to a host of other provisions, the legislation brings into existence a new tax-advantaged planning opportunity for disabled individuals and their families. This legislation is the culmination of a years long battle to ease the financial hardships faced by individuals with disabilities.
What is the ABLE Act?
The Achieving a Better Life Experience Act, or ABLE Act, is a federal law that allows states to establish tax exempt accounts for disabled individuals. An ABLE Account will provide funds for a disabled individual to cover expenses not covered by government programs such as Medicaid. Subject to certain limitations, funds in an ABLE Account will not disqualify or otherwise effect an individual’s eligibility for programs such as Medicaid. While much is still unknown about how these accounts will work, they are based upon the same concept as a qualified tuition program or 529 plan.
Who can be a beneficiary of an ABLE Account?
To be a beneficiary of an ABLE Account, the person must meet certain requirements. They must meet the residency requirements and they must be disabled as provided by law. The beneficiary must be a resident of the state that maintains the program or of a state that has contracted with that state. Disabled is defined as being entitled to benefits based on: (1) blindness, or (2) disability under the Social Security disability insurance program or the SSI program, or (3) a “disability certification” for the individual has been filed with IRS for the tax year. The onset of the disability must have occurred prior to age 26.
What can ABLE Account monies be used for?
ABLE Account funds can be used for “qualified disability expenses.” Qualified disability expenses are expenses related to the eligible individual’s disability and include items like: 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. BEWARE, distributions in excess of qualified disability expenses may be includible in gross income and subject to an additional 10% tax.
Are there limitations?
There are some limitations to the ABLE Act. An eligible beneficiary can have only one ABLE Account. An ABLE Account cannot receive more per year in the aggregate than the annual federal gift tax exclusion, presently $14,000. Like 529 plans, these contributions are non-deductible. Individual states will be left to determine how much total an individual can maintain in an ABLE Account as has been done with 529 plans in the past. For SSI and eligibility purposes only the first $100,000 in the ABLE Account would be disregarded. Anything above $100,000 would suspend eligibility for SSI benefits. The ABLE Act does provide that states can recoup expenses from the ABLE Account on the death of the beneficiary.
Does an ABLE Account replace a special needs trust?
An ABLE Account should be looked at as an additional tool in the planning toolbox and not as a replacement for a special needs trust. A third-party special needs trust, meaning a special needs trust set up by a third party like a parent as opposed to the disabled individual, will allow for larger contributions annually and in total. Additionally, any amounts remaining in a third party special needs trust when the beneficiary passes away are not required to be paid to the state.
There is still much left to learn about the details of ABLE Accounts as federal and state regulations are implemented in the coming months. However, ABLE Accounts provide a new tool and a new opportunity for planning for individuals with disabilities. Stay tuned to learn more.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.