What is an ABLE account and how can it be used to help protect my disabled child's future?
Having a special-needs child is challenging on a variety of fronts -- physical, emotional, and financial. Not only do parents have to worry about caring for their disabled child in the present, but are concerned about how their child will be provided for in the future. Depending on the nature of the child's special needs, and the type of care he or she will require, different arrangements must be made. Having a qualified estate planning attorney who is fully informed about the legal ramifications of financial planning is extremely important.
One of the difficulties with special-needs planning has been that individuals receiving Medicaid and/or Supplemental Security Income or Social Security Disability Insurance have been subject to losing their benefits if they accumulate as little as $2,000 in savings. This makes it almost impossible for parents to set aside assets for the future without a special-needs trust. ABLE, a new type of tax-advantaged state savings plan, offers another method for families to assist their children.
What is ABLE?
ABLE Accounts were created in 2014 as a result of the passage of the Stephen Beck, Jr. Achieving a Better Life Experience Act (acronym ABLE). The account owner is the sole beneficiary of the account and income earned by the account will not be taxed. Contributions to the account must be made using post-taxed dollars and will not be tax deductible, although some states may allow for state income tax deductions for contributions made to an ABLE account.
ABLE accounts are modeled after 529 college savings plans. They permit savings of up to $14,000 a year for anyone who became disabled before the age of 26 and do not count against the $2,000 asset limit.
Although you can't deduct your contribution to an ABLE account on your federal taxes, interest is tax-free as are withdrawals to cover living expenses and qualified costs. According to Sara Weir, president of the National Down Syndrome Society, "ABLE is a game changer."
Do all states have ABLE accounts?
Even though only four states have ABLE accounts so far, most are available nationally. Ohio, Nebraska and Tennessee all permit investment in low-cost portfolios of Vanguard funds, which are available throughout the country, while Florida's ABLE program is open only to state residents. ABLE programs are quickly opening with Virginia and Oregon scheduled for December and 10 other states, led by Illinois, are planning to launch a joint program in 2018. At this point, aspects of the plans vary state-to-state. It is crucial that your estate planning attorney outline your options carefully so you make the wisest choice.
In many situations, a trust may still have advantages over an ABLE account.
Disadvantages of ABLE Accounts
While ABLE accounts can be very useful as a means of covering the expenses of a special-needs child when he or she reaches adulthood, it is important to realize that ABLE accounts have limitations. Although there are no restrictions on how much money you can put into a special-needs trust, with ABLE there is a $100,000 maximum. If you save more than that amount, the account holder (the special-needs individual) will have his or her SSI benefits suspended until the balance falls below $100,000. Even more disturbing, when the account holder dies, whatever money is left in the account may be claimed by the state in order to recoup Medicaid payments.