ABLE Accounts vs. Special Needs Trusts

On December 19, 2014, President Obama signed the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014. This Act is more commonly known as the ABLE Act. What does it mean?

The ABLE Act amends Section 529 of the tax code to create a new Section 529. The Act will have its own IRS regulations, although final regulations have not been issued as of February, 2016.

First, the Act must be implemented on a State-by-State Basis. As of February 2016, Georgia has two competing bills pending in its legislature that would authorize ABLE Accounts. They are HB 710, and HB 768. [Note: Since publication of this article, Georgia created Georgia STABLE].

The ABLE Act provides that an “Eligible Beneficiary” may set up an ABLE account. An Eligible Beneficiary is someone who is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act by reason of an event that occurred before the date the individual attained the age of 26. In other words, individuals who were disabled later in life are not eligible. On the other hand, as long as the disability occurred prior to age 26, there is no age limit on individuals who may establish an ABLE account. Special needs trusts, on the other hand, may be established for any disabled individual, including those disabled after age 26; however,¬†if they are self-settled (e.g., funded with the beneficiary’s money), they cannot be established or funded after the beneficiary is 65.

An ABLE Act beneficiary may only have one exempt ABLE account. An individual may have more than one special needs trust. In fact, many special needs trust beneficiaries have more than one trust because they might have a self-settled trust and a third party trust.

The account must be in the State of the beneficiary’s residence, or must be with a State that has a contract to provide ABLE accounts with the State of the beneficiary’s residence. A special needs trust may be established anywhere as long as it complies with accounting and distribution rules in the beneficiary’s state of residence.

Anyone may contribute to a beneficiary’s account, but only cash assets may be placed in an ABLE account. A special needs trust, on the other hand, may hold non-cash assets such as land or stock.

ABLE account contributions are limited to a maximum annual contribution equal to the annual gift tax exclusion. In 2023, the annual maximum contribution would be $17,000. A special needs trust, on the other hand, is not limited and could accept a contribution of any size. The limit on maximum annual contributions makes an ABLE account useful for planned annual gifting, but a special needs trust is far more useful when the beneficiary is receiving an inheritance, or when settling a lawsuit.

Total contributions to an ABLE account cannot exceed the State’s maximum permitted contribution to a 529 plan. In Georgia, the maximum lifetime contribution is $523,000. There is no maximum contribution limit for special needs trusts.

If the ABLE account balance exceeds $100,000, SSI payments terminate until the balance drops below $100,000 (although Medicaid benefits continue). The beneficiary of a special needs trust does not lose SSI benefits if the account balance exceeds $100,000.

Contributions to an ABLE account are not tax-free, but are treated as a completed gift for purposes of the annual gift tax exclusion.

Withdrawals from an ABLE account are income tax free if they are for “qualified disability expenses.” QDE are defined as education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.” Special needs trusts may make all of these disbursements, and while some of them may be deductible, they are not income tax free. If a special needs trust pays for housing, the distribution may be deemed in-kind support and maintenance, and may cause a reduction in SSI benefits.

ABLE Accounts must include “payback” language. That means if the beneficiary receives Medicaid, and if there are funds remaining in the account when the beneficiary dies, the State Medicaid program has a claim on the remaining funds. Unlike third party special needs trusts, which are not subject to payback, all funds in the ABLE account are subject to a payback claim.

For more information regarding the ABLE Act, see the ARC’s article: Achieving a Better Life Experience.

As a general rule, special needs trusts are more useful than ABLE accounts, although special needs trusts generally cost more to establish. If you would like more information regarding able accounts, or special needs trusts, please contact us at the Elder Law Practice of David L. McGuffey. You can reach us at (706) 428-0888.

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