The ABLE Act Explained

The ABLE Act Explained

Achieving a Better Life Experience — The ABLE Act Explained

On March 21, 2016, Governor Pence signed the ABLE Act, authorizing legislation into law in Indiana. Similar legislation went into effect in Michigan last October. While neither state has ABLE account programs up and running at this point, we anticipate them being available by the end of the year. In addition, Federal law now allows an Indiana or Michigan resident to establish an ABLE account in any state that has a program available. Several states, including Ohio, do have programs that are open and available for investment.

What follows is an explanation of ABLE accounts that we circulated shortly after the passage of the Federal law creating ABLE accounts that provides an overview of what these accounts are and how they can be used.

With a new law passed by Congress and signed by the President late last year, we now have a new tool available to help increase the independence of those with special needs. ABLE accounts have been a topic of conversation for many years and, now that they are a reality, we need to take a closer look at what this law actually created and how they fit into a larger plan. If you have been following the ABLE Act discussions over the years, you may find some surprises in the rules that were actually enacted.

ABLE accounts are derivative of the 529 education accounts that you may already be familiar with and use. Similar to 529 accounts, ABLE accounts are tax-free savings devices, so long as they are funded and distributed according to a strict set of rules. Here are the basic rules for an ABLE Account:

  • The beneficiary must have become disabled prior to age 26.
  • Each beneficiary may have only one ABLE account.
  • Only $14,000 of gifts may be made to an ABLE account per year (this number may be adjusted annually).
  • If the beneficiary receives Supplemental Security Income (SSI), the account balance may not
    exceed $100,000.
  • An ABLE account must be established via a provider authorized by the state of the beneficiary’s residence.
  • Any funds remaining in the account at the death of the beneficiary must be repaid to the state of residence to the extent benefits have been relieved from the state.
  • Funds from an ABLE account may only be spent on qualified disability expenses.

That last requirement is a major change from all of the past ABLE proposals and can significantly limit the usefulness of these accounts. Congress provided a rather narrow definition of qualified disability expenses. For example, housing, transportation, and medical expenses are allowed. Clothing, food, and other personal expenses are not. Any distribution not made for qualified disability expenses will be subject to income tax, a 10% penalty, and cause the entire balance of the account to be a countable asset for SSI and Medicaid purposes.

For competent beneficiaries, ABLE accounts can provide some degree of independence and self-determination. The beneficiary can control the account and can make distributions to him or herself, so long as they are for qualified expenses. For many beneficiaries, the ability to use ABLE funds for housing and transportation can free up their small SSI check for non-qualified uses such as food and clothing and reduce the beneficiary’s dependence on a trustee.

It’s important to note that ABLE accounts are not meant to replace special needs trusts and other estate planning. While special needs trusts do require trustees, they have far more flexibility in making distributions for expenses other than qualified disability expenses. Also, in the case of funds being contributed by parents, grandparents, and other third parties, special needs trusts would not require payback to the state at a beneficiary’s death.

As of the writing of this piece, neither Indiana nor Michigan had announced plans to begin implementing ABLE accounts. However, we expect these new accounts to be administered by many of the same companies as 529 accounts.

Incorporating an ABLE account into your overall special needs plan can add some flexibility into the plan and ABLE accounts can be a useful tool for planning in some circumstances. But, they should be used carefully and with full knowledge of the requirements involved.

For information about how they can work with your estate plan to benefit your special needs family member, contact one of our estate planning attorneys at (574) 232-3538.

Author: Jennifer L. VanderVeen is a certified elder law attorney (CELA) at Tuesley Hall Konopa, LLP where she counsels clients on long term care planning, Medicare, Medicaid, veterans benefits applications, guardianships, special needs trusts, and complex estate planning issues. Jennifer frequently speaks to community groups on caregiver responsibilities and caregiver burnout.

You can contact Jennifer by calling 574.232.3538 or by email jvanderveen@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
Self-Settled Special Needs Trusts

Self-Settled Special Needs Trusts

If a person with a serious injury or disability receives an unexpected inheritance, large settlement or other windfall, their eligibility for Medicaid and/or Supplemental Security Income (SSI) can be jeopardized. In some cases, the loss of these benefits can result in the loss of services that are vital to a person’s independence or well-being. Federal law recognizes that, for those beneficiaries under the age of 65, maintaining their public benefits can be critical to maintaining their future care. So, buried within the Federal Medicaid statutes are the provisions that create what we refer to as self-settled special needs trusts, or d4A trusts (after the authorizing statute).

These trusts serve a unique purpose – allowing a disabled individual under the age of 65 to create a trust with his or her own funds that is exempt for purposes of Medicaid and SSI eligibility. Currently, the trust may only be established by a parent, grandparent, guardian or court. Legislation currently pending in Congress would expand this to allow a capable disabled individual to establish his or her own trust.

There is one drawback to these trusts – at the death of the beneficiary, the trust must first repay the state for any benefits paid to the individual during his or her lifetime. However, in most cases, these benefits are provided at a much lower rate than the beneficiary would have been able to obtain in the regular marketplace, so, even if the payback is made, there will still be a net saving in assets.

More importantly, the funds in the trust remain available during the beneficiary’s lifetime to provide all of the necessities that would otherwise be unavailable if the funds were exhausted on medical care. For example, a child who receives a medical malpractice settlement due to a catastrophic injury at birth can set aside his or her funds in a d4A trust and use those funds for educational and care needs not covered by Medicaid waiver services. The funds can provide care for a disabled child to allow a parent to return to work, equipment to allow a child to communicate or be entertained, or even travel to allow a beneficiary to visit family members.

A special needs trust provides that a trustee has the sole discretion to make distributions for any of the beneficiary’s needs, so long as the distributions do not disqualify the beneficiary from public benefits. The trustee has broad authority to analyze the beneficiary’s needs and the amount of trust assets to determine how the funds can best be used to enhance the beneficiary’s overall quality of life.

Establishing this type of trust requires specialized drafting to ensure that the trust meets with the Social Security Administration’s ever-changing rules and regulations. The attorneys of Tuesley Hall Konopa, LLP have the expertise and knowledge to ensure that a sudden windfall is used to its maximum potential to benefit an injured or disabled person and that the funds are protected in the most effective manner.

Author: Jennifer L. VanderVeen is a certified elder law attorney (CELA) at Tuesley Hall Konopa, LLP where she counsels clients on long term care planning, Medicare, Medicaid, veterans benefits applications, guardianships, special needs trusts, and complex estate planning issues. Jennifer frequently speaks to community groups on caregiver responsibilities and caregiver burnout.

You can contact Jennifer by calling 574.232.3538 or by email jvanderveen@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.