New York Estate Planning & Elder Law Blog
A family with a disabled child faces countless obstacles. For many years, one of the best estate planning tools for parents in such a situation was a special needs trust. These trusts provide resources to care for disabled children while making sure that the child remains eligible for means-tested government benefits.
Many people lately have realized that Achieving a Better Life Experience (ABLE) Accounts can also be helpful. Signed into law in 2014, ABLE Accounts were created by Internal Revenue Code Section 529A which authorizes the state to offer tax-advantaged savings accounts for blind and disabled individuals.
How ABLE Accounts Are Structured
Under the ABLE Act, a person can contribute funds to a designated account that grows without current tax erosion. Additionally, no tax on distribution is paid for qualified expenses.
Over 40 states permit ABLE accounts for residents. ABLE accounts can only be used to benefit people who have experienced disabilities before the age of 26 and who satisfy designated Social Security criteria.
While beneficiaries can manage ABLE accounts, these accounts are instead often managed by parents, professionals, or other individuals acting under power of attorney.
Funding an ABLE Account
Funds placed in an ABLE account are invested through options. Investment changes occur twice a year and only one ABLE account can be formed for a qualified beneficiary. ABLE accounts are often funded through annual contributions, which are connected to the annual gift tax exclusion, which is indexed for inflation.
Lifetime contributions are limited to the amounts imposed by the state’s corresponding 529 plan limits, which are routinely fixed to at least $250,000 but which can surpass $500,000.
If a disabled person qualifies for Medicaid or SSI and is receiving benefits from either that person will remain eligible for an ABLE account. Additionally, funds placed in an ABLE account do not count toward the limits on personal assets for these public benefits. If the assets placed in an ABLE account are greater than $100,000, the beneficiary’s SSI benefits will be suspended until the total falls below the threshold. Medicaid eligibility is not impacted by the amount placed within an account.
Distribution Rules with an ABLE Account
If funds placed in an ABLE account are utilized to pay qualified expenses, the subsequent payouts are not subject to income tax. Qualified expenses, however, must be used to either improve or maintain the beneficiary’s health, independence, or quality of life. Some of the basic living costs, as well as other expenses for which these funds can be used include:
- Administrative services
- Assistive technology
- Education
- Financial management
- Food
- Health care expenses
- Housing
- Personal support services
- Transportation
If a person makes withdrawals for nonqualified expenses, the amount of distributions that can be attributed to earnings is subject to tax at ordinary income rates. A penalty tax of 10% is also placed on the amount in question.
Contact an Experienced Elder Law Attorney
If you have a loved one whose disability came into existence before the age of 26, an ABLE account can prove particularly helpful. A skilled lawyer can help you create and navigate these accounts. Contact Ettinger Law Firm today to schedule a free case evaluation.