Planning is Peace of Mind

ABLE Accounts – Advantages and Disadvantages

The Achieving a Better Life Experience (ABLE) Act, a new federal law passed this year, gives some people with disabilities or their families the ability to establish tax-free savings accounts that will not affect the ability to qualify for, or maintain, government assistance.  ABLE accounts will likely not be available until later this year (2015), and may not be the right option for everyone.  Here are some of the advantages and disadvantages of these new ABLE accounts and how special needs trusts compare.

Advantages:

  • An individual with disabilities can set up an ABLE account with his or her own money instead of relying on a family member or court to establish a first-party special needs trust for his or her benefit.
  • The individual with disabilities can manage the funds in his or her own ABLE account, making the person less reliant on others for assistance and making it easier to access funds.
  • Funds in ABLE accounts grow tax-free and are not subject to gift tax restrictions.
  • ABLE accounts will likely be easy to set up with a local financial institution.

 Disadvantages

  • ABLE accounts can only be established for the benefit of people who developed their disabilities before turning 26 years old.  A special needs trust, by contrast, can be established regardless of when the person developed the disability.
  • Contributions to ABLE accounts are limited to $14,000 per year and can hold up to $100,000 without hurting an Supplemental Security Income (SSI) beneficiary’s eligibility; with special needs trusts, there is no limit on contributions (although gift taxes could apply).
  • If there are funds remaining in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits received by the beneficiary.
  • Then the remaining funds will have to pass through probate (an often onerous court process) in order to be transferred to the beneficiary’s heirs.  On the other hand, if a special needs trust is used, probate is avoided and, in the case of a special needs trust established with funds that don’t belong to the beneficiary, there will be no Medicaid payback.

ABLE accounts will be very useful in a variety of circumstances, but they are not the only, or in some cases, the best solution for a person with special needs to save money.  Consult with your special needs planner before setting up an ABLE account in order to determine, first, if you are eligible to use one and, second, whether other tools, like special needs trusts, may be more appropriate.  Contact us at 888-597-9685 if you would like to discuss your specific estate or special needs planning concerns.

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