Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.
Planning for beneficiaries with special needs requires unique attention. Public benefits can be an essential way to provide for the specialized care these beneficiaries require to allow them to lead fulfilling lives. When assets are given to such beneficiaries, they must be given in a specially-drafted “special needs” trust in order to keep those assets from disqualifying them from public benefits. In addition to such trusts, there is a new tool in the planning toolbox: the ABLE account. The name derives from the legislation, the Achieving a Better Life Experience, or “ABLE,” Act.
An ABLE account may only be established for a beneficiary who became disabled by age 26. The account may be established by the beneficiary, the beneficiary’s agent, guardian, or parent. However, there may be only one ABLE account per beneficiary. A donor may contribute up to $15,000 each year, adjusted for inflation. The owner of the account is the beneficiary.
In many ways, an ABLE account is similar to an education 529 account. For example, the income on assets in the account accrues tax-deferred. If the account is used for “qualified disability expenses” those distributions are income-tax free. Such expenses include a broad range of basic living expenses such as housing and transportation, as well as assistive technology, support services, health-related expenses, and financial expenses like management, administrative, and legal fees. If the assets are used for something that is not a qualified disability expense, the distribution would be taxable plus a 10% penalty. Given the broad definition, it’s very unlikely that one would have difficulty using the assets for a qualified disability expense.
As long as the balance in the ABLE account is under $100,000, the account is disregarded for the purpose of qualification for Supplemental Security Income (“SSI”). In order to prevent disqualification from SSI, it’s imperative to keep the balance under $100,000. If the balance is nearing that threshold, make a distribution for a qualified disability expense.
Regardless of the balance in the ABLE account, it is disregarded for the purpose of qualification for Medi-Cal benefits. Like a special needs trust set up by the beneficiary themselves, at the beneficiary’s death, any remaining assets must first be used to reimburse Medi-Cal.
An ABLE account can dovetail nicely with a special needs trust. For example, distributions from a special needs trust for certain basic living expenses like housing reduce SSI up to a limit. On the other hand, distributions for such expenses from an ABLE account would not reduce SSI, and would be tax-free as qualified disability expenses.
If you care about a special needs child, consider establishing an ABLE account. An ABLE account can add flexibility and tax benefits, too! An ABLE account and a special needs trust are two tools that can help maintain financial eligibility of a person with special needs, while allowing them to Achieve a Better Life Experience, as the name of the ABLE account indicates.
The Litherland Law Firm is a member of the American Academy of Estate Planning Attorneys. If you would like to learn more about the importance of estate planning, we invite you to attend one of our free estate planning seminars.