Most parents don’t expect to provide financial support to their children for their entire lives. But families of children with disabilities may have to.
Recent legislation makes it easier for families to set aside money explicitly to provide for the needs of loved ones with disabilities, while also helping them to become more independent. New state-sponsored accounts allow disabled people to accumulate assets in their own name, without the risk of losing their Social Security disability benefits.
How ABLE accounts work
In 2014, Congress passed the Achieving a Better Life Experience Act allowing for the creation of ABLE accounts, tax-advantaged savings accounts for people with disabilities. (Currently only four states have sponsored such accounts, but that shouldn’t deter you. More on that below.) With ABLE accounts, the beneficiary — the disabled person — is the account owner, but anyone can make a contribution. This marks a major shift in the way families can think about financial planning for a child with special needs.
Because of asset limitations imposed on those who receive Social Security disability benefits, many families previously had no way to set aside money under their child’s own name. The only way to skirt the $2,000 asset limit was to place money in a special-needs trust. The government excludes assets in these trusts when determining if a person is eligible for disability benefits. However, a trustee — not the person with the disability — oversees the account.
A disabled person can have only one ABLE account, and the contribution limit is $14,000 per year. Contributions generally can’t be deducted from federal taxes, although some states may allow state income tax deductions. However, qualified withdrawals for the beneficiary’s disability expenses may be taken tax-free. Investment growth in the account also will be tax-free.
The definition of qualified withdrawals is broad, including expenses like iPads, music therapy and financial planning. This means disabled people can now cover their own expenses for many things other people take for granted, like transportation, owning a cell phone or paying for medical treatments not covered by insurance.
Eligibility and limitations
To qualify for an ABLE account, a person must have been diagnosed with a significant disability before age 26. If you meet the age criteria and already receive government benefits for a disability, either Supplemental Security Income or Social Security Disability Income, you’re automatically eligible. If you don’t receive SSI or SSDI but you meet the age requirement, you may qualify if you meet Social Security’s definition of significant disability and receive a letter attesting to the disability from a licensed physician.
Although the disability must have been diagnosed before 26, there’s no age limit to open an ABLE account. For example, if an individual is in his 50s but received a disability diagnosis at 16, he can open an ABLE account. If you’re unsure if you or a loved one will qualify, consult an advisor or visit the ABLE National Resource Center.
To continue receiving SSI and Medicaid — for which you’re automatically eligible if you receive SSI — your ABLE account must not exceed $100,000.
At the moment, only Florida, Nebraska, Ohio and Tennessee sponsor ABLE accounts, but more states are expected to follow suit. Except for Florida’s accounts, all are available to residents of any state, and you may transfer an ABLE account from one state to another, which could be helpful if your state begins offering ABLE accounts. Account owners should check the specific account rules and limits in their state.
Families should also be aware of the Medicaid payback provision. When the account owner dies, if he or she received benefits through Medicaid, the state may file a claim to be paid back from what remains in the ABLE account. If there’s no money left in the account, the state will get nothing. If there’s more money in the account than needed to pay back Medicaid, the rest will go to the person’s estate.
How to use an ABLE account
One goal of ABLE accounts is to foster independence for disabled people. For this reason, they may be better suited for those who have higher cognitive abilities, since they can start saving their own money and learn money management concepts, a key part of becoming independent.
It’s also important that families have a plan for how the ABLE account will be used. Although many investment options are available, if the money will be used for daily living expenses or short-term goals, the best option is to leave that money in cash. ABLE accounts provide a great opportunity for disabled people to build a significant emergency fund, something they’ve not been able to do in the past. But if the money will be used later in the beneficiary’s life, there are investment options ranging from conservative to aggressive that allow account holders to save and invest for the long term.
The primary benefit of ABLE accounts is that disabled people can control their own money. The accounts don’t, and shouldn’t, take the place of special-needs trusts, for which there are no maximum limits. Instead, using an ABLE account in conjunction with a special-needs trust can be a very powerful planning tool. The trust could put up to $14,000 into the account per year, allowing the beneficiary to use the money, rather than requiring the trustee to pay for whatever the individual wants or needs.
A step in the right direction
As an alternative savings option, ABLE accounts can take some of the pressure off families. Relatives who have wished to help but were unsure how to do so now have a way to assist. And families that have the money but worry about exceeding asset limits can more freely help their children save money. ABLE accounts don’t solve all of a family’s problems, but they are a step in the right direction to giving disabled people more independence and providing families with a sense of security.
Eric Jorgensen is a fee-only financial planner with MainStreet Financial Planning in Silver Spring, Maryland.