As of September 23, 40 states had ABLE Act legislation passed or pending, with most expecting to roll out the accounts in 2016.
“Someone has to set up these accounts and make them cost-effective,” says Jamie Canup, a partner at Richmond, Va.-based law firm Hirschler Fleischer. “I wonder how much the states will charge people for the benefit of tax-free growth, and whether those fees will eat up any benefits the tax protection might provide.”
Another thing that might make families think twice before opening an ABLE account: Any money left over after a beneficiary’s death is used to reimburse Medicaid for his or her lifetime expenses.
“That is probably going to have a chilling effect on the amount of money people put into these accounts,” Canup says. “The accounts might be used to buy a car or house or special equipment, but I can’t see families leaving money in them for any extended period of time.”
“They took away a major advantage of these accounts when they added a payback provision,” Nadworny says. “With an IRA, any other beneficiary would get the money. From a cynical view, you could almost look at this as a loan where the government has first lien on the assets. If I’m under the income limits of a Roth IRA, I would put money into the Roth: It gives all the tax advantages, and the beneficiary would be the child or a special needs trust. I don’t see the benefits of the ABLE account over the Roth account.”
The alternative to an ABLE account are special needs trusts. These can shelter more assets, and the disbursements are not limited to “qualified expenses.” But there are steep legal costs that come with establishing and maintaining them. ABLE accounts are something of an equalizer because they offer an alternative for middle- and lower-income families unable to fund a trust.
“This account comes in at a time when there’s never been a tax-advantaged savings opportunity for the special needs community,” says Mike Walther, president of Deerfield, Ill.-based Oak Wealth Advisors. “In some of the high-tax states, this could be an additional benefit as a planning tool because you could put less tax-efficient assets into an ABLE account.”
Families may compromise between the two approaches—using ABLE accounts for day-to-day needs and special needs trusts for larger, long-term assets.
Unlike traditional 529s, whose time lines generally hinge on a beneficiary’s college education, ABLE accounts can last a lifetime. Beneficiaries can take frequent, regular disbursements—though that kind of use would neuter the accounts’ tax benefits.
“When a family realizes that they have a special needs child, they aren’t going to wait 20 years for their assets to grow,” says Flaum. “These people generally need that money now. They need services now because early intervention is so important. I think the accounts missed how families are allocating their resources, especially in the middle class.”