An ABLE account is designed to ease financial strains faced by individuals with disabilities by making tax-free savings accounts available to cover qualified expenses such as education, housing, and transportation.
This summer, certain states will begin introducing ABLE accounts, providing special needs individuals and their families another resource through which to save and invest for the future. Signed into law in 2014, the ABLE Act and associated accounts are modeled after 529 education savings plans – authorizing states to create their own programs that help people with disabilities and their families pay for disability-related expenses, which for many exceed $30,000 annually.
With Florida, Nebraska, Ohio and Virginia expected to start offering ABLE accounts this month, and others beginning next year, families should be aware of these new tax efficient vehicles and understand how to use them and incorporate them into a broader financial strategy.
Scott MacDonald, Senior Financial Advisor, Merrill Lynch, who specializes in serving the financial planning needs of special needs families and individuals, answers questions about ABLE accounts.
1. What is an ABLE account and how does it work? Is there a limit to how much money I can put into my ABLE account?
An ABLE account is an IRS tax-favored investment account that aids persons with disabilities by allowing them to save for future expenses without interfering with needs-based public benefits, while providing them the right to manage their own assets. ABLE stands for “Achieving a Better Life Experience” and it is similar to laws that govern 529 educational accounts.
According to the ABLE National Resource Center, an ABLE account is designed to ease financial strains faced by individuals with disabilities by making tax-free savings accounts available to cover qualified expenses such as education, housing, and transportation. Distributions from the account can supplement benefits provided through private insurances, the Medicaid program, the Supplemental Security Income program, the beneficiary’s employment, and other sources.
ABLE accounts can be funded only up to the annual federal gift tax exclusion amount as determined on an annual basis. In 2016, this amount is $14,000. This means that the entire ABLE account can only be funded the entire year with a total of $14,000, not that multiple people can each fund it with $14,000. Contributions must be made in cash. It is important to remember that the funding of an ABLE account is gift-tax free. When made by a person other than a designated beneficiary, contributions are non-taxable gifts.
An ABLE account can only grow to a certain amount before jeopardizing public benefits. If an individual with a disability is receiving Supplemental Security Income (SSI), his or her ABLE account can only grow to $100,000 and not be counted for SSI eligibility. If instead, the person is receiving Medicaid only (and not SSI), the account can grow to larger amounts (defined by each state) without counting against traditional Medicaid eligibility.
2. How do I know if I’m eligible for an ABLE account? How can I access an ABLE account in my state? Are ABLE regulations different in each state?
According to Kevin Urbatsch, Esq., national director for the Academy of Special Needs Planners (ASNP), in order to open an ABLE Account, a person must have a “disabling condition that began prior to reaching age 26.” However, this is one of those areas where Congress may be increasing the age requirement. Readers should check the ABLE National Resource Center at http://ablenrc.org/ to see if that age limit has changed. The person opening an ABLE account must swear under penalty of perjury that the person is “disabled” as defined by the ABLE act. The person must also have a signed physician’s statement confirming the disability diagnosis and provide it if requested by the ABLE Plan Administrator or the IRS.
“Disabled” means the person must either already be receiving Social Security benefits based on his or her disability or otherwise qualify as “disabled” by the Social Security Administration. This test is typically different if the person is an adult versus a child.
Currently, only a handful of states have launched their ABLE programs, with many more in various stages of legislative approval. An individual will be able to open an ABLE account in any state that has approved the Act, even if it is not their state of residence. State regulations on contribution limits and state tax credits vary widely. It is important to check what benefits and limits may apply in your state and what advantages your state program may offer. The ABLE National Resource Center site has quality information regarding each state’s limits and approval status.
3. What other resources are available to help cover costs of a special needs child?
The primary vehicle for a disabled or special needs child continues to be the Special Needs Trust (SNT). An SNT can receive essentially limitless funding from an individual or family and not impact needs based public benefits. SNT’s are typically funded through inheritance, insurance proceeds on the parent’s lives, family gifts or lawsuit settlements, among other methods. Managing and investing an SNT is a more complicated matter than an ABLE account, and requires competent professional trusteeship, financial planning and investment management.
It is important for parents to understand that titling of their assets in retirement plans, wills and trusts can dramatically affect their child’s welfare when the parents’ assets are inherited. Incorrect beneficiary designations, outside of a Special Needs Trusts, can cause the child to be subject to repayment of prior public benefits received. This can lead to a significant loss of the family legacy. Proper legal advice from a specialized attorney is recommended. The Academy of Special Needs Planners offers excellent information, as well as attorney referrals, at http://specialneedsanswers.com
Public benefits programs – including state programs such as the Regional Centers of California and similar disabled child programs nationwide – can be the cornerstone of the budget solution for most families. Employment health insurance, Medicaid waiver programs, Section 8 Housing benefits, SNAP food stamps and other federal programs can significantly augment the total family budget when they are properly coordinated.
4. What other actions can I take to ensure my special needs family member is taken care of financially?
A comprehensive, multigenerational financial plan – which integrates the parents’ retirement aspirations with the childrens’ current and future special needs – is essential to properly provide for the family with a special needs member. Determining future needs for special needs children and targeting funding to a Special Needs Trust can make a powerful difference in their lives.
Often families do not have a large pool of financial assets to apply to their future goals. Annual savings programs which fund these conflicting aspirations, coupled with prudent professional investment management, can create the means to drive the long term financial well-being of the entire family. Survivorship life insurance policies are frequently used to create a tax free source of wealth to fund the SNT at a crucial change in the special needs child’s life.
An interesting tool for parents to start the planning process can be found online at http://specialneedscalc.ml.com Ongoing consultation with a financial advisor who is specialized and experienced in these concepts can be quite valuable to the special needs family.
One free item that can help families is to draft a “letter of intent”. This is a non-legal document which outlines the parents’ wishes for the special needs child’s ongoing care after they pass. It can include directives regarding placement, housing, likes and dislikes, triggers, etc. and is a real boon to those who will help care for the child after the parents. A novel approach is to videotape the parents’ message to their child and the caregivers to save for posterity.•