Achieving a Better Life Experience — The ABLE Act Explained

On March 21, 2016, Indiana Governor Mike 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.

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. All THK blogs are considered advertising material by the Indiana Bar Association.