More Will Be ABLE

Like other states, Michigan provides the opportunity for disabled individuals to hold investments to help them cover costs that support their health, independence, and quality of life without affecting their federal Medicaid or Supplemental Security Income (SSI) support. ABLE is the acronym for Achieving a Better Life Experience. Michigan’s version is called MiABLE. The funds held in an ABLE account are not used for means tested governmental programs like Medicaid and SSI. The recent SECURE Act 2.0 just made it a bit easier for a disabled individual to establish, or become the beneficiary of, an ABLE account.

The federal legislation for ABLE accounts was enacted in 2014. The MiABLE program was signed into law a year later. ABLE accounts are part of the more familiar federal statute that authorizes the contributions and tax-free earnings to pay for qualified higher education expenses. [IRC 529(e).] And like the 529 college education expense rules, if the funds held in an ABLE account are not used to pay for qualified disability expenses, the distributed amounts are taxable and subject to a 10% penalty.

Eligibility: To become eligible to own, or be the beneficiary of, an ABLE account requires that the individual: (i) be disabled or blind before attaining age 26; and (ii) is either currently entitled to Social Security Disability Insurance (SSD) or SSI, or who holds a certificate of disability issued by the Department of Treasury.

The SECURE Act 2.0 extends the eligibility rules to permit an individual to have an ABLE account if their disability or blindness originated prior to attaining the age 46. However, this expansion only starts in 2026. Extending the age of eligibility to have an ABLE account will help those individuals with mental illness, disabling diseases, and veterans who become disabled after age 26. Government estimates are that more than 6 million additional individuals will become eligible to open an ABLE account once 2026 arrives.

Qualified disability expenses: The ABLE statute provides a long list of qualified disability expenses that relate to an individual’s disability. That list includes education, housing, transportation, employment training, assistive technology, personal services, health care, illness prevention, overall wellness, financial management, legal fees, oversight and monitoring, and funeral and burial expenses. An ABLE account could even be used to assist the disabled individual’s purchase of a home.

Contributions: There are some technical rules that apply to funding a MiABLE account. For starters, there is an annual limit on the total amount that can be contributed to the ABLE account, which cannot exceed the federal gift tax annual exclusion amount, or $17,000 in 2023. If the disabled ABLE account owner also has earned income, up to an additional $13,590 can be contributed to the account in 2023; this annual contribution amount is equal to the federal poverty level for a one-person household, or the account owner’s wages, whatever amount is less.

Maximum account balance: However, since an ABLE account is a 529 account that is authorized by the Tax Code, the maximum account balance limit for all Michigan 529 plans is $500,000 (which also includes, by way of example, other prepaid tuition or college savings plans.) Only the first $100,000 that is held in a MiABLE account is not considered a ‘resource’ when SSI eligibility is determined. If the amount held in the ABLE account exceeds $100,000, the account beneficiary could lose his/her monthly SSI cash payment, but he/she would continue to receive their Medicaid benefit.

Advantages of an able account: Some of the benefits of an ABLE account include:

• The account can provide a sense of independence to its owner or beneficiary, since the individual will have access to their own funds and the funds can be accessed at any time;
• The individual can accumulate and compound ABLE funds on a tax-free basis without any impact on their SSI and Medicaid eligibility;
• If the individual does not receive SSI and/or Medicaid, he/she can accumulate up to $500,000 in their MiABLE account; otherwise, the limit is $100,000 that can be held in the MiABLE account; and
• Contributors to a MiABLE account can deduct up to $5,000 on a single taxpayer return, and $10,000 on a joint income tax return, when they file their Michigan income tax return.

Disadvantages of an able account: Some of the drawbacks associated with an ABLE account include:

• The individual can have only one (1) ABLE account;
• The individual may fall prey to predators, since they have the flexibility to access their own ABLE account at any time without the need for a trustee’s consent;
• The individual must have more than just a “disability;” the government must acknowledge that disability and the individual will need some certification in order to prove that “disability;”
• If the individual is eligible to receive Medicaid benefits, on their death there is a pay-back obligation to repay the government for the Medicaid benefits that the individual received while alive;
• If the individual has another 529 account, e.g., for qualified higher education expenses, all 529 accounts will be aggregated to determine the maximum amount that can be held in the ABLE account; and
• If expenditures from the ABLE account are not for qualified disability expenses, the distribution will be subject to ordinary income taxation and a 10% penalty;

Closing observations: A MiABLE account can provide a secure source of funds for a disabled individual, which can supplement, but not supplant, reduce, eliminate, or impact benefits that are provided by private insurance, supplemental security income (SSI), Medicaid, or the beneficiary’s employment. To that end, the ABLE account functions somewhat like an informal special needs trust as a source of funds to assist in the payment of expenses without jeopardizing governmental benefits.

The group of individuals who may become eligible to open an ABLE account is soon to grow. Perhaps a trustee should be authorized by a trust instrument to open and fund a MiABLE account on behalf of a trust beneficiary who later-in-life becomes blind or disabled if one of the trust’s material purposes is to provide a nurturing level of independence to a trust beneficiary.