ABLE Account – A Primer
ABLE Accounts – A Savings Option for Disabled Individuals
In 2017, Colorado is expected to implement its plan under the Achieving a Better Life Experience Act, or ABLE Act, which is already in effect in 10 states. This Act creates tax-favored accounts for children and adults whose disability occurred before age 26. The accounts are designed to ease financial strains faced by individuals with disabilities to maintain their health, independence, and quality of life. These accounts will function similarly to 529 college savings accounts, except that distributions must be used for “qualified disability expenses.” This is defined quite broadly as “any expenses related to the individual’s disability, including education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses.”
Disabled individuals and other donors, such as family members, can contribute up to the gift tax annual exclusion amount (currently $14,000) to these accounts each year. However, that is an overall limit, not a per donor limit. Assets held in an ABLE account are not subject to income tax. Distributions made from an ABLE account are not subject to tax to the extent that qualified disability expenses exceed the distribution. Perhaps most important of all, assets in an ABLE account and distributions from the account for qualified disability expenses will be disregarded when determining the qualified beneficiary’s eligibility for most federal means-tested benefits such as Medicaid and SSI. For SSI, only the first $100,000 in each ABLE account will be disregarded and distributions made for housing will still affect benefit levels. At the passing of a beneficiary of an ABLE account, all assets in the account pass to the state Medicaid program and all contributors’ funds are subject to pay-back rules.
Beneficiaries are restricted to one account. Just as with 529 plans, states must first adopt an ABLE plan before these types of accounts can be established. In Colorado, College Invest (https://www.collegeinvest.org/) will be the first financial institution offering this plan. No matter where you reside, however, you can open an ABLE account in any state that accepts outside residents into their program. You can use this tool (http://www.ablenrc.org/state_compare) from the National ABLE Resource Center to compare the state programs’ investment options, costs, tax benefits, and other perks, side by side.
Also like 529 accounts, an ABLE account can be rolled over for the benefit of another individual with a disability. Further, just like 529 accounts, there is a tax surcharge for any non-qualified withdrawal or distribution from the account.
ABLE accounts will allow individuals to give small amounts of money to a disabled individual without disqualifying the individual from public benefits and without having to establish a special needs trust. However, clients will still need to use a third party special needs trust if they wish to give more than $14,000 per year or leave a large amount such as an inheritance. Also, if a disabled individual unexpectedly comes into a larger sum of money, he or she will still need to establish a first party special needs trust to shelter those funds.
written by Jonathan Leinheardt Attorney at Law