The Pros and Cons of an ABLE Account

Do you or someone you love have physical or mental special needs? Do you or they receive any government assistance? If yes, then you need to know about ABLE Accounts.

The ABLE Act

ABLE Accounts are tax-advantaged savings accounts under Section 529 of the federal tax code and are available to individuals with disabilities and their families. The law creating ABLE Accounts is formally known as the Achieving a Better Life Experience Act of 2014.

The Act permits “qualified individuals” to have tax-free savings accounts allowing them to save up to $100,000 without affecting their eligibility for Supplemental Security Income (SSI) and other means-tested government programs, such as Medicaid. If an ABLE Account balance exceeds $100,000, SSI benefits are suspended but Medicaid benefits continue.

Upsides and Downsides

This is definitely good news, and the upsides outweigh the downsides for many eligible to take advantage of this opportunity.

Let’s look at the upsides first:

  • A qualified individual can create his or her own ABLE Account with his or her own money rather than depending on relatives or the court system to set up a “first-party” special needs trust.
  • A person with disabilities can oversee the funds in the ABLE Account, giving them more independence and affording easier access to the funds.
  • The ABLE Account funds grow tax-free with no gift tax liabilities.
  • Regardless of where you live and whether your state has enacted its own ABLE program, you can enroll in any state’s program.

All told, the ABLE Act is groundbreaking legislation: it’s the first time any public policy has acknowledged the substantial expense of living with a disability or caring for a loved one who is disabled. Under the Act, a “qualified disability expense” is any expense related to the designated beneficiary due to living with disabilities. This includes those costs related to rearing a child with significant disabilities or a working age adult with disabilities. These costs include accessible housing and transportation, personal assistance services, assistive technology and healthcare expenses that are not covered under an insurance policy, Medicaid or Medicare.

In practical terms, an ABLE Account supplements—rather than supplants—the benefits of private insurance, Medicaid, SSI, the beneficiary’s employment and other sources.

Okay, now let’s look at the downsides of ABLE Accounts:

  • To qualify, a person must have a disability that occurred before age 26.
  • A person can only have one ABLE account.
  • Annual contributions are capped at the federal annual gift tax exclusion, now at $14,000.
  • Any funds leftover in the account after the beneficiary passes away are required to be first applied to repay Medicaid expenses incurred on his or her behalf.
  • With the exception of Ohio, all other states are still in the process of setting up rules for financial institutions to offer ABLE Accounts (but anyone can open an account in the Buckeye State!).

Final Thoughts

While the ABLE Act gives those with special needs another means of assistance, not everyone will qualify. Accordingly, first- and third-party special needs trusts should still be considered when contributions exceed the Act’s limits or to avoid a Medicaid payback.

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