As more and more states implement the federal provisions available to them under 26 U.S. Code §529A, ABLE accounts are back in the news.
While an ABLE account isn’t exactly a 529 plan, the provisions that make these accounts possible are found in that section of the U.S. Code. In writing legislation designed especially for individuals with disabilities, Congress simply went back to the provisions already written in U. S. Code §529, inserted new provisions for these accounts, added an A to 529 to distinguish them from the other type of 529 accounts this code section allows and presto change-o: the ABLE tax-free savings accounts were born.
President Obama signed this legislation known as ‘Achieving a Better Life Experience’ (ABLE) Act in 2014 as part of the Tax Increase Prevention Act of 2014. As mentioned, the law allows qualified individuals with disabilities to have tax-free savings accounts in which they can save up to $100,000 without jeopardizing eligibility for Supplemental Security Income (SSI) and other means-tested government programs like Medicaid. SSI benefits are suspended for individuals whose accounts are over $100,000, but their Medicaid benefits will continue. However, because the federal legislation simply allowed for each individual state to enact its own legislation, these regulations and provisions from the states has been slow to materialize.
ABLE accounts are actually more permissive than 529 plans in that the funds in these accounts can pay for more than just education - health care, transportation, housing, etc., are all among the additional permitted uses of these accounts. However, to qualify, an individual has to have a disability that happened prior to age 26. Also, each individual with disabilities may have only one ABLE account, and the annual contributions are capped at the federal annual gift tax exclusion. That’s $14,000 this year.
Any funds that remain in the account when the account beneficiary dies must first be used to repay Medicaid for expenses incurred on behalf of the beneficiary giving those caring for special needs loved ones another tool in their arsenal. Obviously, the establishment of so-called first party or D4a Trust is not needed if the initial contribution to the account will not exceed the amount allowed under the Act making disability planning with a ABLE account a lot more cost effective. The pay-back requirement of these accounts however, will continue to make the creation of third-party special needs trusts more attractive since these trusts have no such requirement.
States can offer these types of plans to people with disabilities, but they first must adopt regulations before financial institutions can offer the plans. Right now, Ohio is the only state in the country that currently offers such a plan, but Virginia did enact the ‘Virginia Achieving a Better Life Experience’ (ABLE) bill during the 2015 session and the state agency financial institution that will establish the regulations for these accounts, known as Virginia529, expects to complete their work and offer the first of these accounts by the end of this year. In trying to describe the challenges such planning requires, Virginia529 tells us that “designing and implementing a flexible, affordable, easy-to-access savings program with appropriate, quality investment options takes considerable time and resources. Virginia529 will work as quickly as possible to coordinate regulatory, operational, programmatic and investment option issues required to get the program running”.
It will still require the advice of an experienced estate planning attorney, familiar with the intricacies of both special needs trusts and ABLE accounts to guide clients so that the best plan for their loved one is achieved. For more information go to our website or register online for one of our workshops on this topic.
Reference: NJ101.5 (July 1, 2016) “Special accounts for the disabled”