ABLE Act vs. Special Needs Trusts
Will the ABLE Act Replace Special Needs Trusts
Until now, disabled individuals have had very few options to keep money in their control and maintain SSI and Medi-Cal (Medicaid) benefits. With the signing into law of the Achieving a Better Life Experience, or ABLE Act by President Obama on December 19, 2014 disabled individuals and their families have an interesting new option available. The ABLE Act has been a long time coming, starting with a proposal by the Committee on Intellectual Disabilities in 2004. The California version, CalABLE was passed into law October 2015. So, should you rush to open an ABLE account?
For families with a loved one who is disabled, setting up savings for their needs is extra challenging because of the limit of $2,000 for continued SSI and Medi-cal (Medicaid) benefits. If the disabled individual has more than $2,000 they will not be eligible for these benefits. The ABLE Act addresses this issue by allowing a disabled individual to have an account with more than $2,000 in an ABLE account without being disqualified. But, there are limits on the ABLE account:
- Contributions: Contributions are limited to $14,000 annually, based on the current annual gift tax exclusion. Contributions are limited to cash only.
- Distributions: Distributions must be qualified disability distributions, and are reported monthly to Social Security. Any unqualified distributions are taxed as ordinary income and subject to an additional 10% penalty.
- Medicaid/Medi-Cal Payback: At the beneficiaries death all funds in an ABLE account are subject to Medicaid payback. Any funds left over may go to a family member.
- Suspension of Benefits: An account over $100,000 will suspend cash benefits, but will not disqualify the individual. Once the account goes back below $100,000 benefits can resume without re-applying.
Within these limits, there are some advantages:
- Tax free growth: Funds in the account grow tax free and qualified distributions are not counted as income.
- Protects government benefits eligibility: Subject to the suspension of benefits if account exceeds $100,000 as noted above, the beneficiary remains qualified.
- Beneficiary Control: The account allows the beneficiary to spend the funds, giving them a measure of independence (subject of course to the limits on distributions as noted above).
- Gainful Employment: with an ABLE account, a disabled individual can be gainfully employed, deposit the earnings in the ABLE account and not risk losing their SSI and Medi-Cal eligibility.
For more information about ABLE accounts, and evaluating in which state to set up an ABLE account, visit www.ablenrc.org
Who Should Consider Creating an ABLE Account?
A Gainfully Employed Disabled Individual: If a disabled person is intentionally limiting their employment to keep from disqualifying themselves from SSI or Medi-Cal an ABLE account can give them the flexibility to continue that employment and save for themselves.
UTMA Accounts: If a child has been receiving gifts over the years deposited into an account for their benefit that is now limiting their ability to qualify for needed benefits when they turn age 18, consider transferring the money to an ABLE account when they become available. The other two alternatives are to 1) spend down the money, or 2) setup a Medicaid/Medi-Cal Payback Trust.
Representative Payee: If you are managing an individual’s SSI checks in a “rep-payee” account, the account must stay below that $2,000 limit. One strategy is deposit these funds into an ABLE account.
Contributions from Relatives: Grandparents and other individuals who may consider setting up college funds, may contribute to an ABLE account for the disabled individual.
Alternatives to ABLE
Disabled individuals and their loved ones have several savings options besides the upcoming ABLE accounts including – leaving money in their parent’s name, establishing a Third Party Special Needs Trust, and in some cases, a Roth IRA.
Understanding the Third Party Special Needs Trust
A third party special needs trust (SNT) is set up by someone other than the disabled individual for the disabled person’s benefit. Typically the trust is created as part of a parent’s estate plan for their disabled child. The trust can be either established at the death of both spouses (a testamentary trust) or established now.
- Contributions: Contributions may trigger gift taxes if made while alive, subject to the normal annual and lifetime gift tax exclusions.
- Distributions: Distributions are supplemental to disability distributions, and must be carefully managed so as to not disqualify the beneficiary.
- Tax: A third party special needs trust is a separate taxable entity, and taxed at trust rates, currently higher than personal income taxes, quickly reaching the highest tax bracket.
- Disqualification, not suspension: If funds are distributed incorrectly, it can disqualify the beneficiary from benefits. Once a beneficiary is disqualified, they can reapply for benefits once the disqualification has been removed, a lengthy process.
A Third Party Special Needs Trust has certain advantages
- No Medi-Cal/Medicaid payback: funds in a SNT can go directly to the contingent beneficiaries after the death of the disabled individual without looking at benefits provided by the government.
- No limit on amount or type of contribution: Subject to the gift tax exclusions, any amount or type of asset can be contributed to a SNT.
- Broader Distributions: An ABLE account is limited to qualified distributions; a SNT’s funds can be used for everything else.
Who should consider establishing a SNT?
Anyone considering leaving a disabled individual an inheritance. If you name a disabled individual relying on SSI or Medi-Cal/Medicaid assistance as a beneficiary, that inheritance will result in the individual having more than $2,000 in assets, and disqualify them from the assistance they are relying upon. Instead, if you set up a SNT, you can protect their eligibility for government benefits.
The ABLE account and a Third Party Special Needs Trust are complimentary tools, and used for different purposes. ABLE accounts are an exciting new opportunity for disabled individuals to increase their financial well-being and stability. Image courtesy of foto76 at FreeDigitalPhotos.net