For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. One potential tool is to open a Section 529A account — also known as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act of 2014.
ABCs of an ABLE account
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The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.
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.
ABLE accounts vs. SNTs
For many years, the most effective tool to provide for loved ones with disabilities was to set up a special needs trust (SNT), which provides resources for the care of a disabled child while preserving his or her eligibility for government benefits. SNTs also offer some asset protection against creditors’ claims.
Here’s a quick review of the relative advantages and disadvantages of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must become blind or disabled before age 26. There’s no age limit 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.
Contribution limits. Annual contributions to ABLE accounts currently are limited to $14,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions in excess of $14,000 per year may be subject to gift tax.
Medicaid reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There’s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the account or the SNT.
Discuss your options
If you have a disabled family member you’d like to provide for, an ABLE account may be a viable option. Discuss with your family and your estate planning advisor whether it or an SNT is best for your situation.
