The ABLE Act: Another Perspective
The ABLE Act, which will provide opportunities for disabled individuals to save money without adversely affecting government benefits, was signed by President Obama on December 19, 2014.
The ABLE Act will benefit many families and disabled individuals. The Act has shortcomings, however, and is not for everyone. Recognizing that the regulations are still to be written by the Treasury Department, let’s take a look at some of the advantages and limitations of the Act.
One of the most significant advantages of the ABLE Act will apply to disabled individuals who are approaching age 18 and have assets which exceed $2,000. Previously, in order to qualify for Supplemental Security Income (SSI), families had two choices. One was to spend down the assets to get them below $2,000. The other option was to transfer the assets to a first-party Supplemental Needs Trust, or “Payback Trust.” The expense of setting up a Payback Trust can offset the benefit, and spending down the assets can defeat the original intent of saving the assets. Now, this money can be deposited into an Able account.
If the assets are significant, however, a Payback Trust is probably the better option. The ABLE Act is an amendment of Section 529 of the Internal Revenue Code which governs the very popular 529 College Savings plans. One restriction, however, is that the annual contribution cannot exceed $14,000 without paying taxes (gift tax exclusion). This is one reason that this Act will not be of help for individuals who have more significant assets.
ABLE accounts also will contain a “payback clause” allowing the state to recoup expenses through Medicaid upon the death of the beneficiary, or disabled individual. This clause, in conjunction with the annual contribution restriction, will prevent Able accounts from replacing the need for third-party Supplemental Needs Trusts. Since most parents leave their assets to their disabled child upon their death, the lump sum will usually exceed the annual contribution limit. Likewise, the payback clause would stop most parents from properly funding the Able account, since many parents would not want the residual assets accessible for payback to the state.
The ABLE Act will, however, be a major boost for families who want to put aside savings for their special needs child into accounts where the income will not be taxed, similar to college savings plans. And, most importantly, in a way which will preserve their child’s eligibility for government benefits such as SSI and Medicaid.
Note: ABLE accounts are also investment accounts and will therefore have plan administration expenses. They should not be used as a substitute for checking and savings accounts.