These unique accounts allow you to save money to care for your disabled child or loved one without reducing any other benefits he or she may be receiving.
If your child or loved one has a disability, then caring for them can be a major financial burden. You may have to pay for various forms of therapy or health care in addition to food and shelter. And your health insurance may not cover much of these costs. Fortunately, there are some programs available that can help to alleviate this dilemma.
However, many of these programs (such as Social Security Disability, Supplemental Security Income or Medicaid) impose limits on the amount of assets that you have before they will begin making payments. But there are ways around this. There are some types of savings vehicles that allow you to allocate money in excess of those limits towards the care of your disabled loved one without reducing any benefits that are being paid. The most common type of savings account that can do this is known as an ABLE (Achieve a Better Life Experience) account.
What is an ABLE Account?
ABLE accounts are a type of savings plan that is specifically designed to be used to care for disabled beneficiaries. They were created in 2014 by the Stephen Beck Jr., Achieving a Better Life Experience Act of 2013, commonly known as the ABLE Act. This legislation was strongly backed by both Democrats and Republicans as well as a host of nonprofit organizations that helped people with disabilities.
In a nutshell, ABLE accounts allow donors to place up to $100,000 into one of these accounts to be used exclusively for the care of the disabled beneficiary, who is also the account owner. Anyone can contribute to an ABLE account, such as the beneficiary or his or her friends or family members. However, there can only be one ABLE account per beneficiary, and it is not possible to have multiple beneficiaries for the same account. ABLE accounts are offered and administrated at the state level, although not all states use them.
The Need for ABLE Accounts
As previously mentioned, most forms of public assistance that are available to disabled persons require that the beneficiary cannot have more than $2,000 of assets on hand-which essentially means that the beneficiary has to be virtually bankrupt. But money that is placed inside an ABLE account does not count towards this limit.
The creation of the ABLE account reflects a change in Congressional policy that now recognizes the financial burdens faced by those with disabilities and their families. This burden can include the costs of living and transportation, specialized health care or technology or other devices that are required to enable the disabled person to function to their fullest capacity.
ABLE accounts come with several tax benefits. All money inside these tax-advantaged savings accounts grow tax-deferred until it is withdrawn. Unlike IRAs, annuities and qualified plans, there is no 10% early withdrawal penalty for distributions taken before the owner/beneficiary is aged 59 ½. Contributions must be made with after-tax dollars, so they are not deductible on federal tax returns. But they are tax deductible by some states for up to a certain amount.
All distributions from ABLE accounts are also tax-free as long as they are used to pay for qualified disability expenses. If distributions are taken and used for non-qualified expenses, then this money will be subject to tax plus a 10% penalty in the same manner as non-qualified distributions from a 529 College Savings Plan. However, the Saver’s Credit is not available with these plans.
Perhaps the biggest limitation that is placed upon ABLE accounts is the age limit. The beneficiary must have incurred their disability before reaching age 26. However, they don’t have to open the account before age 26. For example, if a beneficiary became disabled at age 24, then he or she could open an ABLE account any time after age 26, such as when they are 30. But those who become disabled after age 26 are ineligible to open an ABLE account.
The beneficiary must be receiving Social Security Income or Social Security Disability Income at the time he or she opens the account. If they are not receiving either type of income but have become disabled before age 26, then they can still open an ABLE account as long as they meet the Social Security definition of disability. The beneficiary must also furnish a letter of certification of disability from a doctor in order to be eligible. This letter must certify that the beneficiary’s disability will eventually result in death or can be expected to last for at least a year and that the disability occurred before the beneficiary was 26 years old.
The maximum allowable annual contribution that can be made to an ABLE account is $15,000, which is the IRS gift tax exclusion limit for 2018. This limit is aggregated for all donors; their combined contributions cannot exceed this limit in a given year. This limit comes with an annual COLA adjustment for inflation. The aggregate limit over time that can be made to this account is determined at the state level.
This amount will be equal to the aggregate amount the state allows to be contributed to its 529 plan (which is more than $300,000 in some cases). If the account balance exceeds $100,000, then all SSDI payments will be stopped until (and if) the balance falls below $100,000 again. However, any assistance from Medicaid will continue as long as the account balance does not exceed the state’s maximum 529 Plan balance limit. If this limit is exceeded, then Medicaid payments will also stop.
It should be noted that when the beneficiary of an ABLE account dies, the state in which he or she was a resident may file a claim for the benefits that were paid during the time the account was open through the state’s Medicaid program, up to the entire balance in the account. This clause is referred to as the “Medicaid Pay-Back” provision, and it allows states to recoup all of their Medicaid payments retroactive to when the account was opened. Any remaining money in the account is then passed on to the account’s designated beneficiaries.
Which Expenses Can ABLE Accounts Be Used to Pay?
ABLE accounts can be used to pay for any expense that can be categorized as a “qualified disability expense”. This definition is fairly broad, and includes any expense that is legitimately incurred as a result of the beneficiary’s disability. They can include basic living expenses such as housing and transportation as well as more specialized needs such as education and specialized employment training.
They can also include the cost of any form of assistive technology or equipment, personal support services, health care expenses, financial management and other miscellaneous costs such as administrative services. Funeral and burial expenses are also counted as qualified disability expenses.
Fortunately, you don’t have to wait for your state to offer an ABLE account in order to open one. The original law that was passed in 2014 did require this, but Congress repealed this provision a year later. Beneficiaries can open an ABLE account in any state that offers them as long as that state allows out-of-state filers to use them. Ohio, Nebraska and Tennessee allow this while other states such as Florida do not.
How is the Money Inside an ABLE Account Invested?
ABLE accounts resemble 529 Savings Accounts in that each state offers its own array of investment options, ranging from conservative to aggressive. Beneficiaries will need to assess their risk tolerance, time horizon and investment objectives in order to determine which investment choices best fit their needs. Mutual funds are the most common type of investment found in these accounts. Beneficiaries are allowed to make changes in their investment portfolio up to twice a year.
Differences Between ABLE Accounts and Special Needs Trusts or Pooled Trusts
Beneficiaries and their families have more control over their money in an ABLE account compared to any type of trust. And the cost of opening an ABLE account is considerably less than the cost of setting up a Special Needs or Pooled Income Trust. The beneficiary retains control of the money in an ABLE account, while they will much less control over the money placed in a trust.
But many beneficiaries and families will use an ABLE account in addition to a trust in order to maximize their benefits. This is because these trusts have more flexibility in some ways than ABLE accounts. But ABLE accounts are also exempt from seizure in a bankruptcy as long as contributions were made at least two years prior.
Choosing the Best ABLE Account
Over 30 states now offer ABLE accounts, and most of them allow out-of-state residents to use them. There are several factors to consider when shopping for an ABLE account, including:
- Opening an Account – This includes the types of documentation that will be required as proof of the disability to open the account and also proof that the money that is withdrawn is used to pay for qualified disability expenses. Other factors include the minimum amount needed to fund the account and any cost or fee charged by the state to do so.
- Account Fees and Maintenance – Is there a sales charge assessed by the mutual fund company for investing the money? If so, is it charged up front or is there a declining back-end surrender charge schedule that will eventually expire? And are there any restrictions on how the funds can be withdrawn? There may also be a debit card available to use for withdrawals in some states, along with possible incentives to use it.
- Investment Choices – How have the plan’s investment choices (mutual funds) performed over time? How have they done over the past 10 years? The past 5 years? How many choices does the plan offer? Is there at least one investment choice that fits the beneficiary’s investment objective, risk tolerance and time horizon? Also consider whether the state has any specialized programs that provide incentives to save in these accounts and let the money grow. There may also be programs that provide matching contributions or financial education that can enable the beneficiary and family to make better-informed decisions when choosing the investments.
- State Income Tax Deduction – State residents who use their own state’s plan may be eligible for a deduction on their state income tax returns for up to a certain amount of contributions.
ABLE accounts are a major step forward for disabled persons and their families. These accounts provide a means for disabled beneficiaries to accumulate wealth on a tax-advantaged basis without forfeiting their governmental benefits. Consult your financial advisor for more information on these accounts and what they can do for you.