529 ABLE accounts: Your questions answered

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Nearly one in five families today are impacted by a disability. As professionals serving families, when you think of your book of business there is a high probability you have clients who are parents of, grandparents of, or in some way related to an individual with special needs. As a result, it is important that you have at least a general understanding of the financial challenges they may face in planning for and caring for that individual, as well as how different savings and investment vehicles and insurance products may enhance their financial situation. An individual caring for a loved one with special needs may not have the luxury of one day sending them off into the world to support themselves. There could be a lifelong need for financial assistance for the individual. How you work with and help that family could make a significant impact on their future, as well as that of their loved one with special needs.

One of the most recent financial tools to become available is the 529 ABLE Savings Account. The ABLE Act, which stands for Achieving a Better Life Experience Act, was signed into law by President Obama in December of 2014.The ABLE Act allows individuals who were deemed disabled before the age of 26 to save money in specific accounts and not jeopardize government benefits. These are the first accounts available to formally recognize the extra and significant costs of living for a person with disabilities.

• Persons with disabilities depend on a variety of public benefits for assistance with health care, food, housing assistance, etc.
• To be eligible for public benefits, a person generally must meet certain resource limitations, such as reporting no more than $2000 in cash savings, retirement funds, and other significant value at any one time.

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How do the accounts work?

An eligible individual is one who has been diagnosed with a disability before the age of 26 and has been determined to meet the requirements for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) and are receiving those benefits, or someone who submits a “disability certification” to confirm diagnosis. Each eligible individual may only have one ABLE savings account. These accounts are tax advantaged in that the annual growth is tax deferred and is tax free if used for “qualified disability expenses”. These are expenses that relate to the designated beneficiary’s blindness or disability and are for the benefit of maintaining or improving health, independence, or quality of life. Examples of expenses include costs for education, housing, transportation, employment training and support, health, prevention and wellness, burial and legal expenses, costs for financial management, etc.

What are the limitations of an ABLE Account?

• Annual funding limitations are based on the annual gift tax exclusion amount ($14,000 in 2016).
• Maximum funding of $100,000 before losing SSI, which is a monthly income used for many individuals to fund housing and other necessary life-long supports.
• Medicaid Payback Provision at the passing of the individual with the disability, which requires any remaining money in the ABLE Account to be paid back to the government for resources received over the individual’s lifetime.

Understanding state programs available for enrollment

Like 529 college savings plans, each state was given the ability to pass their own legislation enacting ABLE accounts. Over 40 states to date have done so thus far. However, tucked inside a tax bill approved by lawmakers in December 2015, was a provision that allowed for individuals to open an ABLE Account in any state, not only their state of residence. As a result, consumers now have more choice when it comes to setting up an ABLE Account. The following state programs are available as of August 2016: Ohio, Nebraska, Tennessee and Florida. Florida is the only program limited to residents.

RELATED: New ABLE accounts may offer even more benefits for people with disabilities

The program administrators have worked very closely with organizations such as the National Disability Institute, as well as the disability community to better understand their needs. This collaboration and feedback has helped to improve the program websites that individuals use to enroll in the plans, as well as keep administrative and investment expenses low. There is no advisor compensation built into the ABLE savings accounts like there are with 529 college savings plans. This is something to keep in mind when working with families or individuals with special needs to choose the appropriate state program and set up accounts. There are both FDIC Insured savings accounts, as well as investment-based accounts for the owner to choose from. Similar to other investment vehicles, advisors will need to understand the beneficiaries’ risk tolerance and time horizon when guiding investment selection. Each program administrator will also have maintenance fees for the savings accounts.

What are examples of when a 529 ABLE account may be beneficial?

Individuals with disabilities want to be a part of the economic mainstream, too. This involves the ability to earn a living while working, and having the opportunity to save and spend that money how they see fit. A 529 ABLE account will allow for this with the use of debit, or a loadable debit card directly from the savings account. Direct cash can also be accessed and managed by the beneficiary and/or the power of attorney on the account. Assets in ABLE accounts can be used to pay for housing expenses, which can be a large expense for an individual with a disability, and one that may not be fully paid for by their government benefits like SSI. If the rent is paid from the ABLE account in the month the distribution is made, then a person’s SSI will not be reduced. In the past if an individual’s rent was paid for from a distribution from a Special Needs Trust, then their SSI would be reduced, which could ultimately impact their options for housing. In addition, there may be situations when a disabled individual is the recipient of a life insurance policy with a small amount of money, for example $10,000. Setting up a Trust for this amount of money may be cost prohibitive, but the assets need to go somewhere so that benefits are not impacted. An ABLE account would be a cost effective strategy to address this type of situation.

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Will 529 ABLE accounts replace other planning tools?

• There are limitations with using the ABLE account as the only means to prepare for caring for a loved one with special needs over their lifetime. For the majority of families, these accounts will not be the primary account for family (i.e. parents, grandparents, siblings) to save money to provide financial resources.
• Special Needs Trusts will continue to be the foundation for Special Needs Planning as they can receive more than $14,000 per year, the account balance can exceed the $100,000 limit for SSI, and they can provide oversight, financial management and planning strategies.

ABLE represents one of the most significant pieces of legislation since passage of the Americans with Disabilities Act (ADA) 25 years ago (Americans with Disabilities Act of 1990). These accounts offer many new options for financial empowerment for the disability community. When used in conjunction with proper estate planning, they can be powerful tools in setting up individuals for future financial independence, which will ultimately impact our society in a positive way.

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Kathleen Oberneder has worked in the Financial Services industry for over 15 years and is currently a Wealth Management Advisor at Crescendo Wealth Management, LLC. Visit their website to learn more about ABLE Accounts, and Special Needs Financial Planning Services

This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific situation with a qualified tax advisor.
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