The Stephen Beck, Jr. Achieving a Better Life Experience Act of 2014 (“ABLE Act”) was signed into law on December 19, 2014. The ABLE Act authorizes states to establish a qualified ABLE program under which contributions may be made to an account (an “ABLE account”) for the purpose of providing for the qualified disability expenses of the designated beneficiary. This article provides an overview of the rules affecting ABLE accounts, as well as a brief comparison of ABLE accounts with special needs trusts.
Overview of ABLE Accounts
The ABLE Act provides certain eligible individuals with a convenient and tax-advantaged way to save for qualified disability expenses without jeopardizing eligibility for federal means-tested benefits. The designated beneficiary must have had a disability that commenced before his or her 26th birthday and must meet certain other eligibility requirements.
Currently, a disabled individual living in Nebraska risks losing certain government benefits if he or she has more than $4,000 of “countable” assets. Assets in excess of this $4,000 resource limit can result in the suspension or loss of government benefits.
Each disabled individual can have only one ABLE account. The total amount that may be contributed to an ABLE account from all contributors for a single tax year is $14,000 (for 2017). This contribution limit may be adjusted periodically to account for inflation.
The first $100,000 in an ABLE account is disregarded in determining the individual’s eligibility for, or the amount of, any assistance or benefit authorized by any federal means-tested program (although certain distributions to pay for housing are still taken into account under SSI). ABLE accounts are subject to Medicaid “payback” following the beneficiary’s death.
Nebraska Enable Savings Plan
Nebraska has established its own ABLE program known as the Enable Savings Plan. Contributions to an Enable Savings Plan account may be deductible for Nebraska income tax purposes (up to $10,000 per Nebraska state tax return, or up to $5,000 if married filing separately). In addition, earnings grow free from Nebraska state income tax as long as the funds are used only for “qualified disability expenses.” Such expenses include, among other things, expenses related to the beneficiary’s health, education, housing, transportation, employment training, financial management, legal fees, and funeral and burial expenses.
Subject to certain limits, assets in or income from an account are not included in determining eligibility for the following Nebraska programs: (1) aid to dependent children; (2) Supplemental Nutrition Assistance Program; or (3) Nebraska child care subsidy program.
ABLE Accounts vs. Special Needs Trusts
A special needs trust is another common planning tool used to provide financial assistance to a disabled person (the trust beneficiary) without disqualifying the beneficiary for Medicaid, SSI and other government benefits. The following is a comparison of some key differences between ABLE accounts and special needs trusts:
• Cost and Flexibility. ABLE accounts are generally less expensive to create and administer than special needs trusts. Certain ABLE programs, such as Nebraska’s Enable Savings Plan, offer a checking account option which allows for the convenient payment of qualified disability expenses by check or debit card. However, unlike ABLE accounts, special needs trusts are customizable and may be tailored to the beneficiary’s specific needs or circumstances.
• Contribution Limits. SSI benefits will be suspended once an ABLE account’s value exceeds $100,000. An unlimited amount can be contributed to a special needs trust without impacting government benefits. In addition, there is no limit on the amount of funds that can be gifted to a special needs trust, whereas ABLE account contributions are limited to $14,000 per year (in 2017).
• Taxes. Distributions from ABLE accounts, including earnings, are completely tax free if used for qualified disability expenses. ABLE accounts are also not required to file income tax returns like special needs trusts. In contrast, income generated by assets in a special needs trust may be subject to income tax.
• Medicaid Payback. Assets remaining in an ABLE account upon the death of the designated beneficiary must first be used to reimburse the government for Medicaid benefits received by the beneficiary after the establishment of the ABLE account. Any leftover funds in the ABLE account must pass through probate in order to be transferred to the beneficiary’s heirs. If a special needs trust is used, there will be no probate and, in the case of a special needs trust established with funds gifted by third parties (i.e., a “third-party” special needs trust), there will be no Medicaid payback either.
In sum, ABLE accounts offer another useful option to consider when planning for a child with special needs. Used in conjunction with existing planning tools, like special needs trusts, ABLE accounts can help families to save money for a special needs child without jeopardizing valuable federal and state benefits.
If you want to learn more about the planning options available for families with special needs children, please contact a member of the McGrath North Tax Group.