Those with special needs have unique challenges in life. But, there are special accounts available to individuals who were disabled before age 26. The Achieving a Better Life Experience or “ABLE” Act created ABLE accounts under section 529A.
As discussed in the last blog, 529 accounts give preferential tax treatment when the accounts are used for educational expenses. ABLE accounts are similar in structure to the 529 educational accounts. The income earned on the assets in ABLE accounts is not taxed currently. When distributions are made for “qualified disability expenses,” the income is not taxed at all. Qualified disability expenses include a wide variety of expenses, including education, housing, transportation, personal services, etc. (If distributions aren’t qualified disability expenses, the income is taxed and there’s a 10% penalty.) But, the tax benefits are just one of the advantages of an ABLE account.
People can give a total of up to $15,000 per year to an ABLE account for the disabled person. A person can have only one ABLE account. Importantly, the assets in an ABLE account, up to $100,000, are not counted for the purposes of Supplemental Security Income (“SSI”). This allows the disabled person to have some assets, while still allowing them to qualify for public benefits. This provides flexibility and dignity. While balances above $100,000 would result in a loss of SSI, they are still allowed. Also, the account balances, even above $100,000, are not counted when considering qualification for Medicaid. (Many states limit the total amount that may be in an ABLE account to $300,000.)
ABLE accounts can only be set up for someone who was disabled before age 26 and within the limits detailed above. If someone is not within those limits, they can have a “Special Needs Trust” which does not get the tax advantages of the ABLE account, but which will keep the assets from being considered available for public benefits.
Some expenditures from a Special Needs Trust, for example for housing, would be counted as In-kind Support and Maintenance, or “ISM.” ISM reduces the SSI the beneficiary receives.
One way an ABLE account can be particularly helpful is that it can pay for expenses which would have been ISM if the Special Needs Trust paid for it. That way, the beneficiary wouldn’t get the reduction in SSI from the ISM.
ABLE accounts can provide tax benefits, flexibility, and dignity to disabled beneficiaries. They are a great strategy to consider for individuals who were disabled before age 26.
By: Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
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