New ABLE Act Helps Save on Behalf of the Disabled

A little more than a year ago, our blog posted an article about special needs trusts. There is now another avenue available for saving on behalf of individuals with disabilities.

In December 2014, the President signed the Achieving a Better Life Experience (ABLE) Act. The purpose of the legislation is to assist families in saving private funds for disability-related expenses to supplement (not replace) private insurance, Medicaid, SSI or other sources. Of course, there are restrictions.

The account may not exceed $100,000 for purposes of SSI (the consequence is that SSI payments are suspended, not terminated, until the account is below $100,000) and the account cannot exceed the limitations placed on qualified tuition plans (529 accounts). The annual contribution from all sources cannot exceed the annual gift tax exclusion amount, currently $14,000, and must be in cash. Contributions are not tax deductible but accumulate tax-deferred. Withdrawals are taxed to the beneficiary but only to the extent they exceed qualified disability expenses. The disability must have occurred before age 26.

Accounts are deemed owned by the beneficiary. Therefore, on the death of the beneficiary any amounts remaining after payment of outstanding disability-related expenses can be claimed by the state to reimburse for the amount of medical assistance provided after establishment of the ABLE account. This is a major difference from special needs trusts. On the death of the beneficiary of a special needs trust any remaining funds pass in accordance with the trust instrument. On the other side, there is no income tax benefit for special needs trusts. In addition to the federal income tax benefit of ABLE accounts, states may permit state tax benefits as well (Massachusetts has already done so).

There is much more detail to be worked out, but ABLE does seem to offer an alternative to special needs trusts in appropriate circumstances.