Helping Hand

It’s too soon to know exactly how the Achieving a Better Life Experience (ABLE) Act of 2014 will help families secure better financial futures for children with disabilities, but the legislation, passed with strong bipartisan support in Congress and signed by President Obama in December, is receiving close attention.

Hailed as the most significant disabilities legislation since the Americans With Disabilities Act of 1990, the ABLE Act will create tax-free savings accounts for individuals with significant disabilities. The accounts will be housed under Section 529 of the Internal Revenue Code.

ABLE accounts, which offer broader coverage than 529 education savings plans, can’t be set up or funded until the U.S. Department of Treasury establishes rules sometime later this year. An account may be opened by or on behalf of a disabled individual in order to supplement, not supplant, benefits offered through private insurance, Medicaid and Medicare. Money in the account can be used to pay for disability-related expenses, including housing, education, employment training, health care and transportation.

ABLE accounts may be established for individuals diagnosed with a qualified disability prior to age 26, no matter what their present age. Qualified disabilities range from intellectual, developmental and physical impairments to mental illnesses. The regulations will provide more guidance about qualified disabilities and expenses.

Once an ABLE account is established in the beneficiary’s name, anyone can contribute to it. The beneficiary, a family member or another individual on the account can control it.

Tax-free contributions of up to $14,000 per calendar year may be made to an ABLE account. An account balance of up to $100,000 won’t impact the beneficiary’s eligibility for SSI (Supplemental Security Income) benefits. That’s a game-changer from the last 25 years, when individuals with more than $2,000 in assets in their name lost eligibility.

Still, an ABLE account can’t cover all the financial burdens those with disabilities face during their entire lifetime. Nor could it replace the required special needs trust, which, although more complicated to establish and more strictly regulated, does not limit contribution amounts or allowable expenditures.

“The ABLE Act will enhance the planning a family does, but it doesn’t discount what they need to do,” says Minoti Rajput, founder of Secure Planning Strategies, a 25-year-old Southfield, Mich.-based firm with $275 million in assets under management. More than 35% of her 400 client families have a child or sibling with special needs.

She sent an e-mail blast to all her special needs clients when the legislation was signed into law, but like other financial planners she is waiting for more clarity. “A lot of things won’t unfold until spring 2015,” says Rajput, who plans to hold workshops for clients and prospects later this year after more information is available.

ABLE accounts will be mandated by the state in which the disabled individual lives. But just as Medicaid benefits often vary from state to state, Rajput says, it’s unclear what kind of freedom the federal government will give to states to interpret the law. “We need to wait for more details as each state adapts the ABLE Act,” she says.

In general, the ABLE Act should open the door for a person with special needs to have more than $2,000, she says. It will also let parents avoid the stress of opening a 529 education savings account for a special needs child and then having to transfer the balance to a sibling or be penalized for using it to fund non-educational expenses if the child is unable to attend college. She is awaiting guidance on whether funds in an existing 529 education savings account may be transferred to an ABLE account.

Like first-party trusts, ABLE assets must be used to repay Medicaid expenses upon the death of the account holder. So she recommends that families exhaust ABLE accounts before tapping into third-party trusts, which are not subject to state recovery.

All of Rajput’s clients have a third-party trust, which is often funded by life insurance. About 5% also have a first-party trust, which they may have been forced to establish because somebody, say a grandmother, inadvertently left money directly to the child or the child received a payout from a lawsuit, she says.

Families with special needs trusts may not be motivated to create an ABLE account, she says, because they both supplement expenses the government won’t pay for. But for those who have the means, she thinks it’s a good idea—especially if they are in a high tax bracket. “It’s tax deferred and tax-free,” she says. “That’s huge!”

Rajput will help clients review their planning to see if it makes sense to incorporate ABLE accounts into their current arrangements. She will analyze their cash flow as a potential source for funding these accounts.

“It’s ideal to do planning early,” she says, noting that most families still wait until their special needs children are in their 20s or 30s.