What is the ABLE Act? The act is a bill that was introduced in Congress in 2013. It was recently passed by the House, and is up before the Senate. The ABLE act would amend Section 529 of the Internal Revenue code to create tax-deferred savings plan for those individuals with disabilities without affecting those individual’s eligibility for Medicaid or Supplemental Security Income, or SSI.
How would it work? You may be familiar with a 529 Education Savings Plan already. A 529-ABLE account will work in much the same way. Friends and family would be able to contribute to the account, the funds could be invested and grown, and withdrawals could be made for the beneficiary tax free, provided that they are used for qualified expenses such a medical care, education, housing, health and wellness, transportation, assistive technology, and other expenses for the care of the beneficiary. Beneficiaries would still qualify for SSI as long as account balances stay below $100,000. Once the balance exceeds that amount, the beneficiary will no longer qualify for SSI, but would retain Medicaid eligibility.
This all sounds pretty great right? There are a few limitations to the ABLE Act: first, the person with the disability must have become disabled before the age of 26. This really limits eligibility to those with developmental disabilities or neurological disorders during childhood. Second, the ABLE Act would include a payback provision. That means that in the event the beneficiary dies with remaining assets in the 529-ABLE account, the assets are first distributed to the state Medicaid agency that paid for any benefits during the beneficiary’s lifetime, then to the family of the beneficiary.
The next question is, how does the ABLE Act differ from a Special Needs Trust? There are two types of Special Needs Trusts: first party Special Needs Trusts and third party Special Needs Trusts: first party Special Needs Trust is established using the beneficiary’s own assets. It also has a payback provision, but can only be set up by a parent, grandparent, guardian or court, or can be set up through a non-profit pooled trust. A third party Special Needs Trust is established using someone else’s assets, and does not contain a payback provision. All Special Needs Trust distributions must follow the SSI and Medicaid rules so that the distributions do not supplant the government benefits.
There are certainly advantages and disadvantages to the ABLE Act in comparison to Special Needs Trusts. ABLE Act accounts appear to differ primarily in the sense that they can be established by the beneficiary with the beneficiaries own funds, thus eliminating the restriction of the first party trusts that they be established by someone other than the beneficiary. However, if an ABLE Act account is to be funded by another’s assets, it begs the question whether a third party Special Needs Trust is a less restrictive means due to the fact that there is no asset limit, no payback provision, and no age or disability restriction.
The effectiveness of the ABLE Act is yet to be seen. It has not even passed in the Senate yet, but it is nonetheless an important development in the government’s acknowledgement of the challenges that those with disabilities face. It may not be a perfect solution, but it should be considered another tool to consider if you are planning for a special needs beneficiary.
If you need assistance in deciding on the best estate planning tool to use, do not hesitate contacting your estate planning attorney to discuss the best option for you and your family.
For more information on Special Needs Planning visit https://www.sinclairprosserlaw.com/services/planning-for-those-with-special-needs/
- How Often Should I Meet with an Estate Planning Attorney? - January 18, 2018
- Tax Law Changes for 2018 - December 29, 2017
- Dedicated Gardeners & Creative Spaces in Annapolis, MD - May 30, 2017