Those with a family member with special needs often encounter challenges in helping to support them while not undermining access to key government programs. In response to this concern, the ABLE Act was enacted in 2014 permitting the creation of low-cost, tax-advantaged accounts to benefit those with disabilities.
Also known as 529A accounts, ABLE accounts are similar to the well-known 529 college savings plans in that states can establish programs for residents and non-residents. It took a few years for these accounts to become widely available, but now we have over 40 states offering ABLE accounts including low cost option in Colorado. Are ABLE accounts right for your situation? Let’s take a look at them to see if they might be a fit.
When you have a family member with special needs, you want to be able to lend a financial hand. Of course there are key programs that provide a critical safety net for those with disabilities. Medicaid for health insurance is often the most valuable benefit, while SSI payments and SNAP benefits covering food expenses also help many. Individuals who otherwise qualify for these services can lose access to them if they have more than $2,000 worth of assets. Families wanting to help can be caught in a bind. That’s where ABLE accounts come in.
With an ABLE account, up to $15,000 a year can be deposited into an account that can be invested, grow tax-free, and used for qualified disability expenses. The contribution can be higher if the beneficiary is working. These expenses can include housing, transportation, financial management, health care, and personal support expenditures. Unlike the college savings plan, you can only have one ABLE account per beneficiary, and that annual contribution limit is per beneficiary. Many federal benefits do not consider ABLE account assets when determining program eligibility. One exception is that if the ABLE account balance goes above $100,000, then access to SSI payments can be jeopardized.
To be eligible for an ABLE account, it needs to benefit an individual with blindness or the onset of a significant disability before turning 26 years old. With the competition among scores of state plans, costs for ABLE plans are very reasonable. The current annual fee for the Colorado plan (coloradoable.org) is $45 a year, plus investment fees of under 0.4 percent annually. You also get access to a debit card that can be used to pay for qualifying expenses.
Perhaps the most compelling aspect of ABLE accounts are the rock bottom fees and simplicity. You don’t need to pay an attorney to draft a special needs trust. You also avoid serving as a trustee (or paying for one) and filling a 1041 trust tax return every year. You don’t need to deal with K-1s or any taxable income coming from an ABLE account as long as the distributions are qualified.
But ABLE accounts are not the solution for every person with special needs, or it may be best to combine an ABLE account with a more conventional special needs or pooled trust. There are strict limits on how much you can contribute to an ABLE account, while the trust options have more flexibility. Medicaid can lay claim to the assets in an ABLE account to recoup its expenditures upon the death of the beneficiary. In contrast, most trusts are designed to pass on the remainder of the account to other beneficiaries. Also, ABLE account funds may be more accessible if you have a spendthrift beneficiary.
For more information, good resources are the ABLE National Resource Center at ablenrc.org, the Colorado ABLE web site at coloradoable.org, and the non-profit Colorado Fund for People with Disabilities at www.cfpdtrust.org. This is one area when consulting a special needs legal expert could be very helpful, especially if you’re considering the use of a trust in addition to an ABLE account. Good starting places for help are fellows of the American College of Trust and Estate Counsel (actec.org), and also members of local and state bar association groups that focus on trust law.