Understanding ABLE Accounts
ABLE stands for Achieving a Better Life Experience. Established under the ABLE Act of 2014, these accounts are similar to a 529 college savings plan in that they allow loved ones to make contributions which grow tax-free. As long as the funds are used for qualified expenses, including: education, housing, transportation, and healthcare, the withdrawals are also tax-free. Another major benefit of ABLE accounts is that, like special needs trusts, the funds are available to enhance the life of the beneficiary without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid as long as the account stays below a threshold of $100,000 for SSI purposes. The threshold for Medicaid eligibility purposes is higher, but varies by state.
Another important advantage of an ABLE Account is that individuals can manage their accounts whereas a disabled beneficiary cannot be trustee of their own special needs trust. An ABLE account can be opened without the need of an attorney and are relatively easy to operate. ABLE accounts are especially useful for individuals who have modest savings, or receive an inheritance or settlement that is not large enough to make a special needs trust practical.
However, because annual contributions are capped at the federal annual gift tax exemption amount (18,000 in 2024) and the account cannot exceed $100,000 to remain exempt for SSI purposes, these accounts are often not the only planning tool for many families.
Limitations to ABLE Accounts
ABLE accounts are most appropriate for modest contributions. This is not just because of the annual funding limitation and SSI threshold, but also because the accounts are subject to a payback requirement at the death of the beneficiary. If a parent or other third party wants to set aside funds or make a gift for the benefit of a disabled individual, those funds can be placed into a third-party supplemental benefits trust and be used for the benefit of the individual during their lifetime. After their passing, those funds can be designated to pass to another individual, trust or charity. However, funds in an ABLE account are subject to state payback requirements if the beneficiary received Medicaid benefits.
Another issue with ABLE accounts is that they are only available to individuals who were deemed disabled prior to age 26. However, beginning in 2026, individuals who were determined to be disabled prior to age 46 will be eligible.
Best Uses of ABLE Accounts
An ABLE account can hold not just gifts from others, but also funds of the beneficiary, including earnings. This makes them a particularly useful tool for an individual who may work a limited amount or who may be receiving public benefits with an asset threshold. A disabled individual can make contributions to their ABLE account to remain under the asset limit for SSI or Medicaid (subject to the annual contribution limit). This can be a great way to allow the individual to save for a larger purchase, such as a car. The ability of the individual to manage the account can make these accounts great tools for independence, regardless of whether the individual is beneficiary of a trust as well.
ABLE accounts may often be complementary to a trust, since there may be more flexibility in withdrawals from ABLE accounts than from trusts. Depending on the terms of the trust, and the benefits the beneficiary is on, a trust may have strict limits on the use of trust distributions. For example, first party special needs trusts, i.e. those funded with the assets of the disabled individual, require the funds to be used for the sole benefit of the beneficiary. An ABLE Account can be used for a fairly broad array of qualified expenses which are not strictly tied to disability-related needs of the individual. For instance, rent is a qualified expense.
Moreover, there is an important policy exception that allows payments to be made from an ABLE account for housing without causing an impact on public benefits that the same payment from a trust would cause. When an individual on SSI or Medicaid receives housing from someone else, or does not pay fair market value for their shelter costs, this is treated as unearned income, called “in-kind support and maintenance” or ISM. Receiving ISM will result in the beneficiary’s SSI benefit being reduced. It also can be counted as income for Medicaid purposes. If ABLE account monies are used to pay for housing costs, there is no reduction in public benefits. Therefore, I often advise clients to fund an ABLE account for this express purpose in addition to funding a third-party special needs trust.
Coordinating Tools
By using both an ABLE account and a special needs trust, you can create a more robust and flexible financial safety net. While the ABLE account allows for annual contributions and flexibility in distributions, the special needs trust can hold larger assets without jeopardizing mean-tested benefits. A third-party trust can also allow for passing the assets to other beneficiaries after the disabled individual’s death.
It is always advisable to work with an attorney who specializes in special needs planning, not just in helping you design a special needs trust, but in helping you know how to use an ABLE account to complement the trust, as follows:
1. Determine Contribution Strategies: Decide how much you will contribute to each account. Balancing contributions ensures you maximize the benefits of both accounts, and don’t subject funds to payback, unnecessarily.
2. Set Clear Spending Guidelines: Outline which expenses will be covered by the ABLE account, and which will be paid from the special needs trust. Having this clarity prevents confusion and ensures that funds are used effectively.
3. Regularly Review and Adjust: As your child ages and their needs change, regularly review your financial strategy. Adjust contributions, spending guidelines, and trust provisions to reflect any shifts in circumstances or regulations. You may be able to make a distribution from a SNT (Special Needs Trust) to an ABLE account in order to take advantage of the benefits outlined above, such as paying for housing costs without reduction in benefits.
Conclusion
Coordinating an ABLE account with a special needs trust can create a powerful strategy for ensuring your child's financial future. By understanding how these tools complement each other, you can provide your loved one with more financial stability while safeguarding their eligibility for essential benefits.
ABOUT THE AUTHOR:
Shana Siegel concentrates her practice on representing seniors, individuals with disabilities, and their families with life care planning, public benefits, trust and estate planning and administration, resident rights, health care decisionmaking, guardianships and long-term care advocacy. Shana has been certified by the National Elder Law Foundation (NELF) and is recognized as a member of the Counsel of Advanced Practitioners. Prior to joining Norris McLaughlin, P.A., Shana was with WanderPolo & Siegel for over 10 years. She is a past president of the New Jersey Chapter of the National Academy of Elder Law Attorneys (NAELA). Additionally, she has been an officer for the New Jersey State Bar Elder & Disability Law Section.
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