Financial planning for the families of people with disabilities often involves making special arrangements for the future. One of those options is a special needs trust, which I discussed in an article last month.
Now there’s an important new option, called an ABLE account. This tax-sheltered plan can be a useful tool for some families. The name stands for “Achieving a Better Life Experience.” A 2014 law provided for these plans, which are set up by the states. A key provision is that money in an ABLE account doesn’t count as an asset for determining eligibility for Medicaid or Supplemental Security Income (SSI).
North Carolina authorized these accounts in 2015. Eligibility is based on a significant disability that began before age 26. Anyone who meets that age requirement and is already receiving SSI automatically qualifies. That person is considered both the owner and the beneficiary of the account, even though typically it will be opened and managed by someone else: the parent of a minor, legal guardian of an adult, or someone who holds the power of attorney.
In North Carolina, the state treasurer’s office oversees the program. Essential information is available on the agency’s website.
ABLE accounts have many similarities to the well-known “529” college savings plans. In fact, the law explicitly links the two types of accounts. To cite one example I’m familiar with: a family with two adult sons set up a 529 plan for the younger son while he was in elementary school. While attending college, he earned enough income that he didn’t need all the funds that had been set aside for his education. Meanwhile, the older son, who has a major disability, has been receiving Medicaid and SSI benefits. The family is now opening an ABLE account for that son, and rolling over the unspent funds from his brother’s 529 plan. As long as both beneficiaries are in the same family, that is considered an allowed use of the 529 money. The rollover carries no penalties or tax liability.
There are limits. While anyone -- friends, family -- can contribute to an ABLE account, total contributions can’t exceed $15,000 a year. Total savings up to $100,000 aren’t counted toward SSI eligibility. For Medicaid, the ceiling is much higher: $450,000 total savings. Each state sets its own maximums for tax purposes.
A special provision applies to ABLE account owners who hold a job. If their employer doesn’t offer a retirement plan, they can put another $12,140 from their earnings into the account each year.
Also like 529 plans, a variety of investment options are available. These include funds with varying levels of risk and returns. In general, it’s best to choose options that offer higher returns when investing for the long term; money that will be needed in the near future should be invested in safer but lower-return funds, such as money markets.
The ABLE act defines the “qualified” expenses that can be paid from these accounts. Broadly speaking, these expenses should be directly related to the beneficiary’s disability. Examples of permitted uses include certain housing costs, home improvements related to the disability such as wheelchair ramps, transportation, health care and therapy, personal assistance, education, and financial management. While persons who manage the accounts don’t have to submit any kind of regular reports, they remain responsible for documenting how the money is used. At some point the government may ask for proof the funds have been properly spent, so it’s important to keep good records.
It’s also important to note that funds left in an ABLE account after the owner’s death might be subject to repayment of any Medicaid benefits the owner received.
Compared to special-needs trusts, ABLE accounts are easier to create and don’t have major up-front costs. On the other hand, a trust has major advantages, too. It usually has no limits on contributions or total savings, it can apply to people whose disabilities began after age 26, and is shielded from Medicaid payback requirements.
Ideally, an ABLE account should be considered as an option along with a trust, not necessarily as a total alternative to one. The law allows ABLE funds to be used for more basic needs, directly supplementing benefits such as SSI and Medicaid. Funds from a special-needs trust, by contrast, are supposed to be used for extras -- call them comforts or luxuries -- that public assistance doesn’t cover.
Beware of certain complexities. How withdrawals are taxed varies from state to state. Some states will pursue a Medicaid payback, others will not. If a withdrawal is considered “non-qualified,” it may be counted as income and jeopardize the owner’s other benefits. So it’s an excellent idea to get informed professional advice when setting up an ABLE plan. The financial-planning experts at Old North State Trust are well-qualified to help you make decisions for a disabled relative’s future care, including creating an ABLE account.
As Marketing Director, Alyce works to develop, budget, and implement marketing plans, which include advertising, coordination of conferences, special events, and development and maintenance of marketing materials. She also oversees the company’s website, in-house articles, and fostering community initiatives within the organization. Alyce received a BS degree in Interior Design from East Carolina University with a concentration in Business Administration and obtained her teaching certification from UNCW. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.
Cece Nunn - Jul 6, 2020
Vicky Janowski - Jul 6, 2020
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