Individuals with disabilities and their families have many options to set aside funds without jeopardizing eligibility for means-tested government benefits. However, until recently in PA the most common option was to establish a Special Needs Trust. This option works for many, however there are rules limiting the flexibility of the use of Trust funds. With the 2014 enactment of the Stephen J. Beck Achieving a Better Life Experience (ABLE) Act, people with disabilities were/are able to gain increased control over some of their own money and retain a sense of autonomy. While ABLE accounts will not replace other forms of planning that are available to and recommended for people with disabilities, there are definite advantages to adding the ABLE account into an overall plan.
So what are the basics of an ABLE Account?
ABLE accounts are tax-deferred savings accounts that are closely modeled on 529 education savings plans. While ABLE is a federal program, much like 529 education plans, each state is responsible for crafting and administering its own program. Some states only allow residents to enroll, while others welcome out-of-state residents. It’s important to consider not only whether an ABLE account is appropriate, but also which state’s program best suits your situation. In Pennsylvania you can select PA ABLE or look to other states programs that allow non-residents.
Who is eligible?
To be eligible for an ABLE account, a person must be diagnosed, before age 26, with a disability that would entitle him or her “to benefits based on blindness or disability under Title II or XVI of the Social Security Act.” Once eligibility is determined, the individual or a third party (e.g., the disabled individual’s parents, siblings, or friends) can establish and fund an ABLE account.
How much can be placed in an ABLE Account?
The maximum yearly contribution limit is currently $15,000 (however, additional contributions may be permitted for employed account owners). It is a per account limit; so no matter how many people contribute, the maximum per year from all sources cannot exceed $15,000. This limit is set by federal law and is tied to the amount that can be excluded from federal gift taxes (currently $15,000); so it may be increased from time to time as a result of inflation. There is also a maximum value that your account can have. Currently that is $511,758. By law, the maximum value is the same maximum that a PA 529 College Saving Account can have, which may also increase as a result of tuition inflation. In comparison, a SNT has no limit to the amount that can be added to the principal,
What happens when the beneficiary passes?
The PA ABLE account can be used to pay for any outstanding Qualified Disability Expenses, as well as funeral and burial expenses. Typically speaking, for most who are receiving public benefits, the remaining balance of the ABLE account will go to address the DHS Statement of Claim for accumulated Qualified Disability Expenses.
Under proposed Internal Revenue Service (IRS) regulations, if a Beneficiary dies, the ABLE account becomes part of the Beneficiary’s estate. Those regulations are not yet final or in effect. States have asked the IRS to consider other options. Specifically, as allowable under Pennsylvania law, the other option would be to transfer the account to the Beneficiary’s sibling, if any, who is also an Eligible Individual.
When the assets are transferred to the estate, any growth on the contributions will be subject to income tax but not the 10% additional tax applicable to Non-Qualified Withdrawals. For this reason, it usually will be best to pay any outstanding Qualified Disability Expenses, including funeral and burial expenses, from the ABLE account, which will be tax free, before the assets are transferred to the estate.
Should you have both?
Whether there is a First-Party or Third-Party Special Needs Trust, it often makes sense to establish an ABLE account outside the trust for the benefit of the trust beneficiary. The trustee (ACT) cannot establish the ABLE account. However, ACT can be authorized to fund an ABLE account. This arrangement gives you more flexibility and the right to exercise some control over your funds.
Check out our page on the benefits of an ABLE Account as well as PA ABLE for additional information. As always, ACT is here to help in any way possible.