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The Achieving a Better Life Experience Act (ABLE)

The Achieving a Better Life Experience Act (ABLE)

The Achieving a Better Life Experience Act (ABLE) was created as a part of the 2014 Tax Increase Prevention Act. The primary goal of the ABLE Act was to create a new section under existing Section 529, which give families with special needs loved ones additional planning options. ABLE plans that qualify under the new Internal Revenue Section 529A, allow families to plan for special needs beneficiaries with tax-free growth, accumulate of funds for special needs beneficiaries, and for the most part avoid disqualifying beneficiaries from state and federal aid. While Congress undoubtedly created a new and valuable tool for special needs families, beware of anyone that preaches they are an all-encompassing replacement for special needs trust or other special need planning options. ABLE based plans certainly fill an important niche`, but are not the cure-all that some individuals believe them to be.

To create a 529A ABLE account, the beneficiary must be a person who currently receives Social Security disability (or funds from a state program funded by Social Security) for a disability or blindness that began before the age of 26. If the beneficiary does not currently receive Social Security disability, he or she can still qualify if a physician certifies that the individual is disabled or blind due to a deficiency that began before the age of 26 and is expected to result in death or will last (or has lasted) for at least twelve months.

ABLE plans or accounts are similar to 529 college savings plans in many ways. Both are funded with after-tax funds and all growth inside of the account is tax-deferred, with all distributions for qualifying expenses being tax-free. For ABLE accounts it is very important to understand what expenses are qualifying expenses. For a special needs beneficiary of an ABLE account, distributions for education, housing, transportation, employment support and training, assistive technology and personal support services, health and wellness, financial management, administrative services, legal fees, oversight and monitoring fees, and funeral and burial expenses all are qualifying expenses under 529A. It is important to note that any distributions that are non-qualifying expenses are treated as pro-rata distributions and any gains tied to those distributions are treated as ordinary income to the beneficiary and are subject to a 10% early withdrawal penalty.

Potential issues with 529A ABLE plans:

  • While families who open 529 college-savings accounts are free to select a plan offered by any state, those with 529 ABLE accounts must use the plan offered by the state in which the beneficiary resides.
  • Total annual contributions to 529 ABLE accounts are currently capped at $14,000, and each beneficiary is restricted to one such account.
  • Contributions to 529 ABLE accounts are irrevocable gifts.
  • Once an ABLE account balance exceeds $102,000, SSI benefits are suspended until the balance of the ABLE account falls back below $102,000.
  • Qualified distributions for housing expenses are still treated as countable income for Social Security Income purposes.
  • The Biggest issue with ABLE accounts – under IRC 529A(f) when the beneficiary dies, the remaining balance of the ABLE account must be used to repay the state for any Medicaid assistance received by the beneficiary after the account was created. The state is basically a creditor of your loved ones ABLE account.

The above list is not an exhaustive list of potential planning concerns. Some of those concerns, especially the largest one (the state as a creditor), can be addressed with a properly drafted special needs trust. However, 529A ABLE accounts may be the best fit for certain families. If for example the amount left to a special needs beneficiary is closer to the $50,000 range then an ABLE account likely makes. Also, if the funds are likely to be exhausted by the time the special needs beneficiary passes away, then there isn’t a concern about the government coming back into take their share. The state as a creditor is limited to whatever is left in the ABLE account at death. If there is a zero balance in the account, then the state gets nothing and has not further recourse to seek repayment. Finally, ABLE accounts are much cheaper to create than traditional special needs trust. If the cost of implementation is a concern a well thought out cost benefit analysis needs to be done.

Special need planning is a fact and situation intensive discussion that needs to take place when planning for a special needs beneficiary. You and your loved ones are probably best served by speaking to a qualified legal professional that can help you discuss the available options and give you an honest assessment of the best fit for your situation.

Contact us to start your planning for this ABLE Act.

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