The ABLE Act has emerged as a hot topic in special needs planning circles — among attorneys, financial planners and insurance advisors.
The ABLE Act refers to the Achieving a Better Life Experience Act, a bipartisan piece of legislation signed into law by President Barack Obama in December 2014. It amends Section 529 of the Internal Revenue Code, the portion known to many families as a tax-advantaged savings vehicle for college costs. The ABLE Act expands the possibilities of Section 529 so that it includes provisions to create tax-free savings accounts for individuals with disabilities. For special needs families, the good news is that the ABLE Act presents a real opportunity for parents to leave more money to their disabled child. However, without careful planning when funding an ABLE 529 account, generous intentions may have an unwelcome impact.
Under the provisions of the ABLE Act, beginning in 2016 (or possibly 2017, depending on the state), disabled individuals will be able to keep up to $100,000 in a Section 529 plan. They may use the funds for education, housing, transportation and other expenses. Any assets in the ABLE 529 account will not be calculated as part of the individual’s financial limits used for means-tested programs like Supplemental Security Income and Medicaid.
Planners will want to work with a guardian to ensure that the disabled individual and the person handling their day-to-day financial matters knows where to place certain funds. That’s nothing new; disabled individuals have long had to either spend down their own funds or place them in a Special Needs Trust to avoid the loss of government benefits.
The use of life insurance proceeds is another area of particular concern to special needs planners. A frequent conundrum for special needs families lacking substantial wealth is that leaving a child with too many assets can render them ineligible for government benefits, including Supplemental Security Income and Medicaid. Once the ABLE Act is in effect, funds for an ABLE 529 account can come from life insurance proceeds, up to a state-established limit, usually around $300,000. And while some families may choose to fund an account with life insurance proceeds, most families would be best advised to avoid such an approach.
Indeed, the ABLE 529 accounts might better be used as a supplement to Special Needs Trusts, especially for families with any substantial assets. The annual contribution limits to an ABLE account are the same as annual gift limits for estate taxation purposes, currently $14,000 per person per year. Families may want to consider directing life insurance proceeds to a Special Needs Trust and making only selective gifts to the ABLE 529 account. Once an ABLE 529 account accumulates a balance in excess of $100,000, the account holder loses Supplemental Security eligibility and remains eligible only for Medicaid.
The age of the account beneficiary is another potentially limiting issue. A key point for advisors is to encourage families to have a disability documented, even if they are not currently planning to create an ABLE 529 account. As is the case with Supplemental Security Income, it is required that a disability be diagnosed and documented prior to age 26 for an individual to be eligible for an ABLE 529 account.
The practical details of how ABLE 529 accounts will function have yet to be clarified, as both states and financial institutions must first determine regulations and implementation strategies.
The availability of ABLE 529 accounts is undoubtedly good news for the special needs community, but it brings with it new complexities. It will benefit low- and middle-income families the most. Families with more substantial assets will need even more careful planning to ensure that established limits are understood and considered. This underscores the opportunities and challenges that exist in financial and insurance planning for special needs families and the importance of consulting a qualified professional.
The Chartered Special Needs Consultant (ChSNC) designation available from The American College of Financial Services is one example of a credential tailored to the special needs planner. The ABLE Act gives these planners and the families they serve a powerful tool, but it must be handled cautiously, especially when used in conjunction with the other tools in the special needs planning toolbox.