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Provide Support for Disabled Family Members with an ABLE Account

Provide Support for Disabled Family Members with an ABLE Account -

By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®
Published On 03/27/2017

ABLE, short for Achieving a Better Life Experience Act, is a type of savings plan established in 2014 to provide support for those with disabilities. The accounts are similar to traditional 529 plans in that contributions can grow and be distributed tax-free for qualified expenses. The difference between a college savings 529 plan and an ABLE 529A savings plan is that ABLE funds can be withdrawn tax free to cover qualified disability expenses versus just qualified education expenses.

Does having assets in an ABLE account impact federal benefits?

Assets in an ABLE account won’t impact federal benefits unless the balance exceeds $100,000. Any excess beyond $100,000 in an ABLE account is considered personal assets, and once personal assets exceed $2,000 (such as in their checking account), Social Security benefits are suspended. This means that if assets in an ABLE account are $100,000 or more, plus checking or any other account surpass $102,000, Social Security benefits are halted. Social Security benefits resume once personal assets fall below $2,000 ($102,000 including $100,000 in ABLE account).

If you take distributions from your ABLE account for qualified housing-related expenses and retain them to be paid the following month (such as paying rent the following month), those distributions are countable resources for Social Security.

ABLE accounts do not impact Medicaid eligibility. However, upon the death of the recipient of aid, Medicaid can claim assets, such as those in an ABLE account, for payback. Outstanding qualified disability expenses, such as burial costs, receive priority over Medicaid claims. If Medicaid payback claims are greater than the remaining ABLE account, there is no further recourse against the disabled beneficiary’s other assets.

What are the eligibility requirements for an ABLE account?

To be eligible, the onset of your disability must have occurred before age 26, and you must be receiving or entitled to receive Social Security Disability Income or Social Security Income. Eligible individuals can self-certify, so they don’t need to provide a written diagnosis of their disability when opening the ABLE account. While the signed diagnosis by a doctor is not required to open the account, it must be readily available in case the diagnosis needs to be verified.

Who can contribute?

Family, friends, donors and even the eligible individual can contribute to the ABLE accounts. The maximum annual contribution for an ABLE account is $14,000 from all sources. Beneficiaries are also allowed only one ABLE account and are considered the designated beneficiary and account owner. Similar to traditional 529 plans, many states permit a state income tax deduction for the person who made the contribution. Many states don’t offer ABLE plans, so you can open the plan in another state. Even though eligibility for federal benefits is impacted when assets surpass $100,000, many states have savings caps in ABLE accounts around $300,000 (for example, Ohio has a cap at $426,000).

You can’t transfer/rollover traditional college savings 529 plans into ABLE plans. Only cash can be contributed.

What’s included in qualified disability expenses?

Qualified disability expenses include:

  • Education
  • Housing
  • Transportation
  • Employment training and support
  • Assistive technology
  • Personal support services
  • Health, prevention and wellness
  • Financial management and administrative services
  • Legal fees – oversight and monitoring
  • Funeral/burial

Funds distributed for non-qualified disability expenses are subject to a 10% penalty and ordinary income tax on the earnings portion of the withdrawal. The non-earnings portion (basis) can be withdrawn tax-free.

How are funds distributed from an ABLE plan?

The ABLE plans offer debit cards, making it easy to pay for expenses with the funds in the plan. You can also make distributions by completing a form for the plan, like you would to withdraw from a traditional 529 plan.

At the time of distribution, ABLE plans don’t need to know or confirm whether the distributions are for qualified disability expenses or to specifically identify those used for housing expenses. It’s up to the designated beneficiaries to keep track of and categorize distributions when filing their tax returns.

The account owner (disabled individual), parent or legal guardian or the designated power of attorney can control the funds in the ABLE account and how they are distributed.

Should I consider this over a special needs trust?

It depends. While it can be expensive to establish a Special Needs Trust, families with a higher net worth would benefit from spending the money to set up the trust and ensure better protection of the assets, less stringent eligibility requirements and no caps on annual or total contributions. Special needs trusts require that you file annual tax returns for the trust and time spent by a trustee to administer the trust, while an ABLE account may only incur a small annual maintenance fee. If the assets you move to a disabled family member are around $100,000, the ABLE plan may make sense as it has no setup costs and can be easily administered.

The following strategies may make sense:

  • Use both ABLE and special needs trusts – Fund the ABLE account for a few years and enjoy tax-free growth. Spend down the ABLE assets first so that Medicaid can’t reclaim any assets.
  • Disabled with modest income – If the disabled individual earns a modest income that jeopardizes their eligibility for federal benefits, they can transfer excess funds up to $14,000 a year into an ABLE account. Once transferred, their federal benefits can be restored.
  • Family of modest means – If the family wants to ensure that they can shelter funds for a special needs child, but they don’t have the resources to make a special needs trust necessary, they can open an ABLE account instead. Family and friends can then contribute to the account.

Can an ABLE account be transferred to another disabled person?

Yes, but the new account owner would also have to meet the eligibility requirements to have an ABLE account, and be a sibling. If these conditions aren’t met, distributions from the ABLE account will be treated as nonqualified withdrawals subject to a 10% penalty and income tax on any earnings.

We suggest that you discuss this option with an advisor to determine if an ABLE account or a special needs trust makes the most sense for your family.

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By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®

Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.

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