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May 2016
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May 16, 2016

Are ABLE Accounts the Answer for Those with Disabilities?


If you have a child or relative with a disability, you are likely familiar with this dilemma—the child or relative with a disability often needs extra financial assistance because of the disability, yet providing the needed financial assistance may disqualify that person from disability benefits such as Social Security and Medicaid. Fortunately, there are solutions to this dilemma. One solution is to create a Special Needs Trust for the benefit of the disabled individual. When properly done and funded with assets from anyone other than the disabled individual, Special Needs Trusts allow the disabled beneficiary to receive government assistance and also receive trust distributions for needs over and above what is provided by the government programs.

Soon, however, there will be an alternative way to achieve some of the benefits of a Special Needs Trust without the cost of establishing a trust. At the end of 2014, Congress passed the Achieving a Better Life Experience Act (ABLE Act) and Section 529A was added to the Internal Revenue Code. Section 529A ABLE accounts are modeled after Section 529 college savings accounts and provide a way to fund an account in the name of an individual with disabilities. Like a Special Needs Trust, funds in an ABLE account will not disqualify the beneficiary from government benefits (assuming the account funds do not exceed capped amounts) and the funds can be used for disability-related expenses such as housing, transportation, education, health and wellness.

Advantages to ABLE accounts are that they are relatively easy to set up. In Michigan, contributors to the account may claim an income tax deduction and, unlike assets in a Special Needs Trust, assets in the ABLE account grow income tax free (similar to a 529 college savings account). Also, both third parties and the disabled individual may contribute to the ABLE account.

Despite the advantages, however, ABLE accounts will not likely replace Special Needs Trusts because there are a number of disadvantages:
 
  1. The disabled beneficiary must have a condition that began prior to attaining age 26.
  2. Each beneficiary may only have one account (unlike 529 college saving accounts).
  3. Total contributions to an individual’s ABLE account from all sources cannot exceed $14,000 per calendar year.
  4. The total contributions into the ABLE account are capped at each state’s limitations for 529 accounts and only the first $100,000 in an ABLE account will not adversely affect the individual’s eligibility for Social Security disability benefits.
  5. Unlike a Special Needs Trust,the assets remaining in anABLE account at the beneficiary’s death are subject to the Medicaid payback rules. This is not the case when a Special Needs Trust is established by individuals other than the beneficiary.

ABLE accounts must be created in the state of the owner’s residence (another difference between ABLE accounts and 529 college saving accounts).

In October of 2015, Michigan passed its own ABLE Act, but it is still a work in progress. The state has yet to establish the logistical framework to open such an account. Nonetheless, this will likely happen soon and when it does, we will better know the usefulness of this new tool for individuals with disabilities. In the right situations, ABLE accounts may prove to be an inexpensive way to provide a disabled individual with more financial resources and independence.

To learn more about ABLE accounts or financial situations involving individuals with disabilities, please contact a member of the Trust and Estates Practice Group. 

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