by Thomas D. Begley, Jr., CELA
New Jersey has passed the Achieving a Better Life Experience ACT (“ABLE”). While the Act has passed, it will take some time to implement. Many commentators believe that by Fall accounts will be able to be opened.
Under the ABLE Act, people with disabilities and their families may set up special savings accounts similar to 529 Plans to be used for disability-related expenses. Earnings on these accounts are non-taxable. Generally, if the fund does not exceed $100,000, it will not be counted for Supplemental Security Income (“SSI”) purposes. If the fund exceeds $100,000 then SSI will be suspended, but Medicaid can be continued so long as the total amount in the account does not exceed the amount authorized for 529 Plans. To be eligible, an individual must become disabled prior to age 26 and be disabled. If the individual receives Supplemental Security Disability Income (“SSDI”) or SSI or files a Disability Certification under IRS Regulations, she will be considered disabled.
Funds can be used for education, housing, transportation, employment training, support, assistive technology, personal support services, health, prevention and wellness, financial management and administrative fees as well as legal fees and expenses for oversight and monitoring.
The total amount contributed to an ABLE account in any one calendar year by all contributors cannot exceed the amount of the federal annual gift tax exclusion, which for 2016 is $14,000. The drawback to these accounts is on the death of the account owner, any funds remaining in the account must be used to repay Medicaid for any funds advanced on behalf of the account holder. The best strategy seems to be to use these accounts for small gifts. Normally, these accounts would be used for gifts from parents. As long as the gifts are less than $14,000 per year and do not accumulate very much, these accounts might make sense. However, because of the Medicaid payback, it does not make sense to have these accounts grow. A Third Party Special Needs Trust is a much better option, if the amount involved is significant.
The advantages of an ABLE account are the tax-free income. However, realistically this is not a significant advantage because the income on small accounts is low and the other income of the beneficiary with a disability is usually low, so the tax saving sounds more attractive than it actually is. The other advantage is that there is a minimal cost to establishing the account when compared to establishing a Pooled Trust or a Third Party Special Needs Trust.
The disadvantages are the Medicaid payback and the possible loss of SSI. Because of the Medicaid payback, it makes little sense to build up a large account. The SSI benefit of approximately $750 per month is a significant benefit that should be protected.
Ideally, ABLE accounts appear to be useful if they are in the $25,000 to $50,000 range, but not for larger accounts. A Pooled Trust or Special Needs Trust would be more appropriate.