An Overview of the New ABLE Accounts: Tax-Free Savings Accounts for People with Disabilities

At the end of December 2014, Congress instituted a new type of savings account for people with disabilities who became disabled before they turned 26.  Called “529A” or “ABLE” accounts, these allow individuals and families to set aside up to $14,000 a year in tax-free savings account without affecting eligibility for government benefits. Contributions are in after-tax dollars but earnings grow tax-free. 529 ABLE accounts are established in the beneficiary’s name but contributions into an ABLE account can be made by any person. It is important to note, that the beneficiary has control over the spending from the accounts.  Unlike other types of special needs trusts, disbursements from the fund are more limited to certain qualifying expenses such as the costs of treating the disability, or for medical expenses, education, housing and health care, or burial expenses.  Caution should be taken spending as there can be hidden consequences.

Beneficiaries are limited to one ABLE Account with a maximum contribution of $14,000 per year.  The existence of the account will not compromise the individual’s ability to qualify for such benefits as SSI or Medicaid unless the account balance exceeds $100,000.  If the beneficiary is receiving SSI benefits, when the assets in the account total $100,000, monthly SSI benefits will be placed in suspension. If the assets in the ABLE account drop back below $100,000, the SSI benefit suspension ceases and any SSI benefit resumes.

If the beneficiary dies with assets in an ABLE account, those assets are first distributed to any state Medicaid plan that provided medical assistance to the beneficiary. For that reason, families looking to establish a fund for individuals may prefer to set up their own special needs trusts which allows them to protect the trust from state recovery and choose secondary beneficiaries other than the state.

The act takes effect at the beginning of 2015, and many states are forecasting that plans will be available starting in July 2015. States must first set up the administrative support to control and provide investment options for the “529A” accounts. Once in place, ABLE accounts will become another tool to protect valuable benefits while enhancing quality of life.   Because of the limitations, many families of people with disabilities should still consider setting up traditional special needs trusts to provide enhanced care for their relatives with special needs.  Before making a decision, it is important to talk to an attorney who can advise you on the best options for your particular needs.

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Tip #3: What can a SNT pay for?

Funds held in a properly drafted special needs trust will not affect a Supplemental Security Income (SSI) or Medicaid recipient’s benefits.  But problems can develop when funds come out of a special needs trust.  This leads to one of the most commonly asked questions about special needs trusts – what can the trust pay for?

This questions is best answered by stating what a special needs trust for an SSI beneficiary should typically never do without first consulting a special needs planner: the trust should never give the beneficiary cash or a cash equivalent or pay for food or shelter.

The simplest part of this rule is the part dealing with cash.  If an SSI beneficiary receives cash (or a cash equivalent like a gift card) from a trust (or anyone else for that matter), her benefit will be reduced by one dollar for each dollar received, up until the point that she loses SSI completely.   This is a hard-and-fast rule and should be disregarded only after a serious conversation with an attorney.

The rules about food and shelter are a little more complicated.  If a trust pays for a beneficiary’s food or shelter directly to a landlord, restaurant or store, the beneficiary could lose up to one-third of her SSI benefit.  In addition, payment of bills for housing-related expenses like mortgage payments, real estate taxes, utilities and condo fees are considered payments for housing that cause a similar reduction in benefits.  While a one-third reduction in benefits might be a small price to pay for guaranteed shelter and meals, if the beneficiary works or receives other income, the additional one-third reduction could cause the beneficiary to actually lose SSI, and accompanying Medicaid benefits, entirely.

Once you have taken cash, housing and food off the table, a special needs trust can typically pay for most other things a beneficiary might need to supplement her lifestyle.  But because these rules are very complicated, it is best to always sit down with your attorney to discuss what you intend to do with your trust before making any payments to anyone.

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Tip #2: Don’t disinherit the special needs beneficiary

Many disabled persons receive Supplemental Security Income (“SSI”), Medicaid or other government benefits that provide basic food, shelter and/or medical care. The loved ones of the special needs beneficiaries may have been advised to disinherit them – beneficiaries who need their help most – to protect the public benefits. But these benefits rarely provide more than basic needs. And this solution (which normally involves leaving the inheritance to another sibling) does not allow loved ones to help their special needs beneficiaries after they themselves become incapacitated or die.  The best solution is for loved ones to create a special needs trust to hold the inheritance of a special needs beneficiary.  A properly drafted special needs trust will protect public benefits a disabled beneficiary may be receiving, and it will provide for proper care of that individual throughout their lifetime.

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Tip #1: Special Needs Trusts

Tip #1:

Special needs beneficiaries require special planning.  As a society, we have come a long way since 1987 regarding stereotyping people with special needs and these individuals’ planning requirements, but there remain numerous misconceptions that often result in costly mistakes when planning for special needs beneficiaries. These misperceptions may become even more costly in the future as fiscal pressures cause state and federal governments to cut back funding for people with disabilities. Thus, it is critically important that loved ones proactively and properly plan for these individuals.
The fiscal pressures of the federal and state governments make proactive planning for special needs beneficiaries increasingly more important.  It is important not to make the mistakes below that could cause special needs beneficiaries to rely exclusively on shrinking government funds, or that place them in unduly restrictive or ineffective structures.

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