For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), it can be a challenge to provide the most comfortable life possible for the family member, yet not jeopardize the person’s eligibility for needed government benefits.
For many years, the most effective solution has been to set up a special needs trust (SNT). But in 2014, the federal Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.
How ABLE Accounts Work
The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.
The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses,” which may be for health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management, or legal services.
An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.
Comparison with Special Needs Trusts
Here’s a quick comparison of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if one’s home state offers them or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.
Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses such as travel, recreation, hobbies, and entertainment.
Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.
If you have questions regarding ABLE accounts, an attorney at TuckerAllen can help.