ABLE Accounts: A New Planning Tool for Persons with Disabilities

Persons with disabilities have been seeking a way to save for college, medical equipment and health care expenses, and retirement without being disqualified from government assistance programs such as Medicaid and SSI (Supplemental Security Income) for decades. Generally speaking, a disabled person receiving needs-based government assistance cannot have more than $2,000 in a bank account or other assets. There are exceptions for a personal residence, one car, certain work-related equipment, and general household furniture and furnishings.

ABLE Accounts

ABLE accounts became a reality with the passage of the Stephen Beck, Jr. Achieving a Better Life Experience (“ABLE”) legislation in 2014. It was hoped that the ABLE legislation would be the solution disabled persons had sought, but the reality has fallen short. For one, the availability of ABLE accounts has been slow to come about. As of November 2016, just five states have ABLE accounts available. Ohio was the first to offer an ABLE account, the Ohio STABLE program. It allows for out-of-state enrollees. Other programs that allow for out-of-state enrollees are: Michigan’s MiABLE program, Tennessee’s ABLE TN program, and Nebraska’s ABLE program. The Florida ABLE United program is limited to residents of Florida. In addition, the restrictions on ABLE accounts make other alternatives, such as a special needs trust, a necessity. However, an ABLE account is a very viable tool that should be considered by estate planning attorneys who specialize in assisting parents and others who are planning for the future of their special needs loved ones as well as disabled persons who have come into money, such as a settlement of a lawsuit related to personal injury.

Third Party Special Needs Trust

Parents and grandparents (and other loved ones) can leave an inheritance for a person with a disability through a third party special needs trust. These funds can be used to assist a person on needs-based government assistance without disqualifying them. However, the person with disabilities cannot serve as trustee of (be in charge of) the special needs trust. This is a blessing if the special needs loved one lacks the capacity to manage his or her income and assets, but very frustrating to persons on government assistance who could otherwise manage their own affairs. Furthermore, distributions of cash will reduce (dollar for dollar) any SSI received by the special needs person. Distributions for food and shelter may also cause a reduction of benefits, so they should be evaluated before being made. Any assets left in the special needs trust after the death of the special needs loved one can be designated to go to family members, friends or charitable organizations.

Own Special Needs Trust

The story is different when the special needs person is trying to create his or her own special needs trust. This usually occurs when the person receives a lawsuit settlement, receives an unprotected inheritance or is fortunate enough to win the lottery or receive some other unexpected lump sum of money. This requires the creation of a first party special need trust. A first party special needs trust cannot be established by the disabled person – it must be created by a parent, grandparent, guardian or a court.

If the court is creating the special needs trust because of a litigation settlement, the court will often maintain jurisdiction over the trust – which means the trustee will have to provide accountings to the court on a periodic basis. Because the government is allowing the disabled individual to maintain eligibility for government assistance despite having assets over the $2,000 limit, the first party special needs trust must be drafted to require the repayment of any Medicaid benefits paid by the state from any assets left in the trust upon the death of the individual. Often the amount of repayment can be in the hundreds of thousands of dollars, which means there is a strong possibility that nothing will be left to distribute to charity or loved ones from the remainder of the trust.

ABLE Account Details

An ABLE account allows the special needs person to put money into an account they can manage (assuming they have capacity). A disabled person is only allowed to have one ABLE account. The amount which may be contributed to the account in any one year is limited to the annual gifting limit set by the IRS (currently $14,000 per year). The total amount that can go into the account is set by each state and is the same maximum that can be used to fund a 529 Plan in that state. Although it is possible to have more than $100,000 in an ABLE account, the excess over $100,000 would be countable for purposes of qualifying for SSI. Assets in the ABLE account grow income tax free.

Distributions from the ABLE account for “Qualifying Disability Expenses” (“QDE”) are income tax free and are not countable as “income” for eligibility purposes. Qualifying Disability Expenses are any expenses related to the special needs person as a result of their disabilities. These may include education, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence, and/or quality of life. Some distributions for housing are not QDE. A distribution that does not qualify as QDE is subject to income tax and a 10% penalty. If there is any money left in the ABLE account at the death of the special needs person, it must be used to reimburse the state for the cost of Medicaid provided, as is with the case with a first party special needs trust.

Conclusion

The ABLE account is a great tool if the disabled beneficiary comes into a small amount of money. It can also be used to add flexibility to a first party or third party special needs trust, allowing the special needs person to have some control over some of the money to make QDE purchases. It also may be a great vehicle to hold required minimum distributions (“RMDs”) from an IRA that are payable to a special needs trust – causing the distributions to be taxed in much the same way as a conduit trust without the eligibility disadvantages that would otherwise be created by distributing the RMDs directly to the disabled person. While the ABLE account will not eliminate the need for special needs trusts as was hoped for by many advocates, there are many instances the ABLE account can work in conjunction with the special needs trust to achieve more flexibility and control for the beneficiary.