For those who raise a child with special needs, there is concern about both today and tomorrow. Today’s concerns can be securing and affording the right education, caring for the child, and giving them access to the therapies they need to improve their quality of life. The concerns shift to tomorrow when you wonder whether or not your child will grow up to be an independent adult or will require financial assistance of some kind for the rest of their lives.
Supporting an adult child has financial strains of its own. You may have saved for their college education, but are you prepared to help support them into adulthood even after you no longer are around? Adults with disabilities may qualify for programs such as Supplemental Security Income, known as SSI, that provides a modest level of monthly income. Medicaid for health care, food and energy assistance, and rental vouchers may also be available.
But parents are left in a quandary. How do you build up resources for your child that will endure after you’re gone, while not jeopardizing the assistance they need? Most programs have very strict limits on the resources of their recipients. If you simply gift assets to your child, they would lose eligibility for most assistance.
The primary answer was a special needs trust. You as parents would gift assets to the trust, which has your child as a beneficiary. The trust has provisions in it that ensure that its assets are not counted against eligibility for assistance programs. But drafting such a trust properly involves working with an experienced attorney, finding a trustee other than the child, and then finding the right bank or brokerage firm to custody the assets. Many parents were daunted by the complexity and expense of setting up and administering a special needs trust.
Recent federal legislation now gives us an alternative in the form of so-called ABLE accounts. ABLE accounts give us a tax-advantaged way to save funds for the benefit of disabled individuals without impairing their eligibility for public assistance.
Similar to 529 college savings plans, ABLE accounts must be used toward specific expenses of the beneficiary of the account. The list of eligible expenses is extensive, and includes housing costs, education, transportation, training, legal fees, health care. The funds inside ABLE accounts are able to grow tax free and qualifying distributions from the account are not subject to tax.
While the legislation was passed in 2014, many states have been relatively slow to introduce ABLE plans for their residents. While states such as Ohio and Tennessee moved quickly to introduce plans for their residents, Colorado is included in the long list of state that do not offer ABLE plans. There are plans for Colorado to roll out ABLE accounts in 2017, but you don’t have to wait. Fortunately, Congress amended the law to allow for individuals to fund accounts in any state, regardless of their state of residence.
There are some important limits to keep in mind when setting up an ABLE plan. First, there can only be one ABLE account per beneficiary. If aunts, uncles, and grandparents want to help build the account, they must all contribute to the same account for the benefit of a single person. Second, the maximum amount that can be contributed from all sources in a calendar year is $14,000. For this reason, I’m writing this column now before Colorado has rolled out ABLE plans so that you have an opportunity to open and fund an account for 2016 and not lose the chance to contribute $14,000 this year.
Third, there are maximums in place for the total balance on the ABLE account. There are two significant limits to keep in mind. Each state has a limit on 529 college plan balances and it’s likely that this limit will apply to ABLE plans as well. In Colorado the maximum balance per beneficiary is $400,000. Keep in mind that you may wish to keep the funding in this account lower than this as once the accounts go above $100,000, your child may not be eligible for some federal assistance programs including SSI.
Finally, ABLE accounts may only be set up to benefit those who were disabled earlier than age 26, consistent with SSI eligibility guidelines.
If you have a special needs child take a close look at the Tennessee ABLE plan, which has most investment options available at a cost of 0.35 percent annually. You can always roll the balance over to the Colorado plan when it’s introduced as there will likely be state tax benefits to funding a Colorado ABLE plan.
For more information on ABLE accounts, consult the web site of the ABLE National Resource Center at ablenrc.org.