Take-Away: Recent changes to ABLE accounts make them more attractive, especially for families that cannot afford legal fees to create a special needs trust. However, there are still plenty of drawbacks to creating and funding an ABLE account.

Background: An individual whose disability or blindness commenced prior to age 26 is eligible to adopt an ABLE savings account. An ABLE account looks a lot like an IRC 529 Qualified State Tuition Program account. The technical name for such an account is the The Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 (hence the acronym ABLE account.) ABLE accounts are expressly authorized under IRC 529A. The Social Security Administration revised and updated its Program Operations Manual System [POMS] regarding ABLE accounts in March of 2018. ABLE accounts are promoted as an effective savings mechanism for individuals with disabilities, which is technically accurate, but only up to a point.

Attributes of an ABLE Account:

  • Contributions: Contributions, from all sources, are limited to the federal gift tax annual exclusion amount, or $15,000. [IRC 2503(b).] In addition, if the disabled individual has earned income, that earned income, up to the poverty level of $12,060 (for 2019) may also be contributed to the individual’s ABLE account. Contributions to an ABLE account are not treated as taxable income to the disabled individual. A contribution to an ABLE account by a third person is treated as a nontaxable present interest gift to the individual for the donor’s gift tax reporting purposes; it is not treated a future interest. Accordingly, a donor’s contribution will have a zero inclusion ratio for GST tax reporting purposes. [IRC 529A(c)(A)(i); Prop. Reg. 1.529A-4(a)(1); Reg. 25.2503-3(a).]
  • Account Limits: The maximum that can be accumulated in an ABLE account is capped at the state’s limitation for a 529 account. This means that the ABLE account limit will vary from state to state, e.g. from $215,000 up to $445,000 depending upon the state.
  • Distributions: Distributions from an ABLE account for the individual’s qualified disability expenses are not taxable income to the individual.
  • Qualified Disability Expense: A qualified disability expense is an expenses incurred while the individual meets the Social Security Administration’s blindness or disability definitions and which are incurred for the benefit of the individual in order to maintain or improve his/her health, independence, or quality of life.
  • Medicaid Payback: A state is permitted to file a Medicaid payback claim against an ABLE account balance on the individual’s death equal to the total medical assistance paid for the individual, but for payments made only from and after the date the ABLE account was established. This Medicaid payback claim right extends to contributions to the ABLE account made by third parties. [Proposed Reg. 1.529A-2(p); POMS Sl 01130.740.A.]

Perceived Benefits of an ABLE Account:

  1. No lawyers are involved to open an ABLE account, unlike the attorney’s fees incurred to establish a special needs trust.
  2. ABLE account assets grow tax deferred, like an IRA, and the expenses paid from the ABLE account, if used for qualified disability expenses, are tax-free, just like a distribution from a Roth IRA.
  3. An ABLE account permits some level of financial autonomy for the disabled individual, as opposed to a trustee managing the funds held in the account.
  4. An ABLE account does not jeopardize existing SSI or Medicaid eligibility when the benefit recipient controls more than $2,000.
  5. Unlike a first-party special needs trust which imposes an age limit (age 65) on contributions, there is no upper age limit on first-party contributions to an ABLE account.
  6. There is no formal approval required from the Social Security Administration or Medicaid with regard to an ABLE account, unlike a first-party or third party trust.
  7. Unlike a special needs trust, payments from an ABLE account for the individual’s food or housing expenses will not reduce his/her SSI benefits.
  8. State Medicaid payback claims are limited to medical assistance expenses paid for the individual after (not before) the ABLE account was established.

Drawbacks to an ABLE Account (Compared to a Special Needs Trust):

  1. Contributions to an ABLE account are potentially subject to Medicaid payback claims, but they are protected if made to a third-party special needs trust.
  2. Annual contributions to an ABLE account are limited to the annual exclusion gift amount, or currently $15,000, unlike a special needs trust where more can be funded.
  3. Once the value of the ABLE account exceeds $100,000, the individual’s monthly SSI payments are suspended; benefits are not impacted with a special needs trust.
  4. In order to be eligible to establish an ABLE account, the individual must meet the government’s technical definitions of disabled or blind.
  5. The individual’s disability or blindness must have occurred prior to attaining age 26 years.
  6. The only person who can establish an ABLE account are the individual, his/her parents, a legal guardian, or an attorney-in-fact, in contrast to a first-party special needs trust established by the disabled individual. [42 U.S.C. 1396p(d)(4)(A).]
  7. The individual may establish only one ABLE account, in contrast to multiple special needs trusts established for a disabled individual.
  8. Contributions to an ABLE account must either be cash or its equivalent; a special needs trust can be funded with any type of asset, including mutual funds.

None of these restrictions or limitations apply to a third-party special needs trust that is created for the individual with disabilities. Third-party special needs trusts are not governed by a federal enabling statute and they are not subject to most of the federal statutory requirements mandated for a first-party (self-settled) special needs trust.

Conclusion: A third-party special needs trust is far more flexible than an ABLE account as to amounts, purposes, and administration, not to mention no Medicaid payback obligations. Yet not too many families with an individual with disabilities can afford to create and administer a special needs trust, which is where an ABLE account comes into play as another helpful tool. While contending with the Medicaid payback rules with ABLE accounts and a first-person special needs trust is always an irritant, it is also important to remember that: (i) the Medicaid payback amount is calculated based on the actual Medicaid rate for expenditures incurred during the beneficiary’s lifetime, which is significantly lower than private pay rates for the same services; and (ii) the amount recovered with the payback does not include an interest component, which thus amounts to the equivalent of an interest-free loan from the government to the beneficiary.