Posted On: FEBRUARY 2023
Estate planning can be tricky for a family that includes a disabled loved one. Why? Because the family doesn’t want to lose eligibility for means-tested government benefits, such as Medicaid or Supplemental Security Income (SSI).
A Section 529A account — better known as an ABLE account because it was created by the Achieving a Better Life Experience (ABLE) Act — generally won’t affect the beneficiary’s eligibility for Medicaid and SSI, which limits a recipient’s “countable assets” to $2,000 with a few exceptions.
What are the specifics of an ABLE account?
Under the ABLE Act, you may contribute funds to a designated account that grows without current tax erosion, much in the same way that 529 plans operate. Furthermore, there’s no tax on distributions paid for qualified expenses.
Currently, more than 40 states and the District of Columbia have established ABLE accounts for residents. If you live in one of the handful of states that doesn’t permit ABLE accounts, you can create one in a state that allows nonresidents to participate. Fees paid to administer the account generally are minimal.
Bear in mind that an ABLE account may be used only to benefit an individual who experienced a disability prior to the age of 26 and who satisfies certain Social Security criteria. Therefore, it’s not available to every disabled person.
An ABLE account can be managed by its beneficiary. However, these responsibilities typically are handled by the parents, a professional or another person acting under a power of attorney.
How are ABLE accounts funded?
Funds in an ABLE account are invested through options authorized by the applicable state. Investment changes may be made twice a year, and only one ABLE account can be set up for a qualified individual.
Normally, an ABLE account is funded through a series of annual contributions. These contributions are tied to the annual gift tax exclusion, which is indexed for inflation. (The gift tax exclusion amount for 2022 is $16,000 and is $17,000 for 2023). Plus, lifetime contributions are limited to the amounts imposed by the individual state for 529 plan accounts. These limits are generally at least $250,000 — and can exceed $500,000.
However, there are complications related to other programs. If a disabled individual meets SSI or Medicaid requirements and is receiving benefits from either, or both, he or she is still eligible for an ABLE account. An ABLE account’s funds don’t count toward the limits on personal assets for these public benefits.
If the assets in an ABLE account exceed $100,000, the beneficiary’s SSI benefits will be suspended until the total drops below this threshold. However, Medicaid eligibility will not be affected by the account’s amount.
Also, be aware that contributions to an ABLE account aren’t tax deductible. Some individual states have carved out limited state income tax benefits for these accounts.
What are the distribution rules?
If the funds in an ABLE account are used to pay for qualified expenses, the payouts are exempt from income tax. Qualified expenses must go toward maintaining or improving the health, independence or quality of life of the beneficiary. These include basic living expenses for education, food, housing and health care.
However, if withdrawals are made for nonqualified expenses, the portion of the distributions attributable to earnings is subject to tax at ordinary income rates, plus a 10% penalty tax is imposed on that portion.
Is an ABLE account right for you?
If you have a disabled family member you’d like to provide for, an ABLE account may be a viable option. We can assist you to determine if an ABLE account is right for your situation.