The Achieving a Better Life Experience (ABLE) Act was introduced into Congress on February 13, 2013 as a means to ease the financial burden for disabled individuals and their families by creating a tax-exempt, state based private savings accounts to fund disability-related expenses to supplement benefits currently provided by Social Security, Medicaid, employers, and private insurance. With the ABLE Act being signed into law on December 19, 2014 by President Barak Obama, it is important to review the good, the bad, and the ugly associated with the ABLE Act so clients can make an informed decision regarding whether or not they choose to utilize this type of account.
THE GOOD: The good aspects of the ABLE Act are clear in that it encourages and assists disabled individuals and their families to set aside funds to maintain the health, independence, and quality of life of the disabled individual, and it provides secure funding for disability-related expenses of the disabled individual to supplement those benefits currently being received (e.g. from Social Security, Medicaid, employers, and private insurance).
Further, interest earned on an ABLE account will be tax-exempt, and disabled individuals can keep their Medicaid coverage regardless of the amount of money accrued in their ABLE account. Thus, it provides similar benefits to a special needs trust without having to go through the time and expense of setting up a special needs trust.
Additionally, amounts placed into an ABLE account would be excluded from the donor’s bankruptcy estate so long as the disabled individual is a child, stepchild, grandchild, or step grandchild of the donor, the funds were not pledged or promised to any entity in connection with any extension of cred and are not excess contributions to the ABLE account, and such funds do not exceed $6,225 during a specific time period.
THE BAD: The bad aspects of the ABLE Act begin with its eligibility requirements. To be eligible, the disabled individual must have a condition that arose before he or she turned 26-years old.
Further, an ABLE account cannot exceed $100,000 without risking eligibility for governmental benefits, and, unlike 529 college savings accounts, the standard gift-tax limitations of $14,000 per person per year apply ($28,000 per person per year for a married couple), whereas 529 college savings accounts permit a donor to front-load 5-years’ worth of annual exclusion gifts in one year.
Finally, the benefits of ABLE accounts are limited to disability-related expenses only. Unlike a special needs trust, which allows its funds to be used for “supplemental services” (e.g. items that Medicaid and other governmental programs do not cover or have denied payment or reimbursement for, even if those items include basic necessities such as physical or mental health care or enhanced versions of basic care equipment and items that are not included for payment by the per diem of the facility in which the disabled individual lives), “disability-related expenses” are limited to education, housing, transportation, employment training and support, assistive technology and personal support services, legal fees, and expenses for oversight and monitoring, and the funeral and burial expenses of the disabled individual. If distributions exceed the disability-related expenses of the disabled individual, the excess distribution will be counted as income.
THE UGLY: Among the ugly aspects of the ABLE Act, and most likely the most detrimental to its utility, is the Medicaid payback provision. Upon the disabled individual’s death, any assets remaining in his or her ABLE account will be used to “payback” any state Medicaid plan up to the value of Medicaid services provided to the disabled individual, which amount is calculated based on amounts paid by Medicaid after the creation of the ABLE account.
There is also an exception to the ABLE accounts being disregarded for governmental benefits eligibility for distributions for housing expenses under the supplemental security income programs and amounts in an ABLE account exceeding $100,000. Further, supplemental security income benefits will be suspended to the disabled individual during any period in which he or she has excess resources in his or her ABLE account; however, it would not suspend or effect his or her Medicaid eligibility.
Finally, despite being signed into law, each state must now put regulations in place so that financial institutions can make the ABLE accounts available. Therefore, it could be months before ABLE accounts are available for use.
This article was originally written by Phil Kaufmann, Esq. CFMF Board Member/Treasurer and Trey Bennett