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.

Expense Considerations
Michael Beloff, a financial advisor and special needs financial planner with Shelton, Conn.-based Barnum Financial Group, an office of MetLife, has been following the ABLE Act with keen interest. About half his clients have a child or sibling with special needs.

He is also the father of a 16-year-old son, Ben, with autism. He is working to help Ben become as independent as possible, but says he will need continuing care throughout his life.

MetLife, which established the MetLife Center for Special Needs Planning in 1998 to service families whose children have special needs, plans to closely follow the upcoming ABLE Act regulations and advise clients when more information is available.

Meanwhile, using a special needs calculator can help families project future expenses. When planning for medical, educational and housing needs, Beloff says it’s important to think about how often dependents will need medical treatments, whether they will require funds for college or if they’ll live in a group home or in their own place.

“Housing is going to be the next big battle for families,” he says, given the number of individuals coming through the system. It’s very costly and waiting lists are long. Parents also need to know that when their child turns 21, the SSI will be reduced by a third if he or she lives with them and receives room and board, he says.

Like any financial planning, special-needs planning is an ongoing process, says Beloff, who also tries to help direct clients to professionals who can assist with testing, legal and negotiating needs, and other services. Situations change, medical needs change and so do the people involved in the life of the special needs child, he says.

Behind The Scenes
It will take some time for each state to contract with a mutual fund company to run its ABLE accounts. The process involves reviewing not only contracts and regulations but also filings with the Securities and Exchange Commission.

Rick Hodges hopes to open an ABLE account as soon as they are available in his state, Virginia. His daughter Audrey, who has Down syndrome and is now 14, had just turned 4 years old when Hodges attended a free seminar on how to save money for a child. He quickly realized the options discussed, for typical children, were unlikely to fit her needs.

“I knew we needed our own accounts for people with disabilities,” he says. “The key to that is flexibility.”

Hodges, a writer and editor for the National Association of Letter Carriers and the father of two, took his idea to the Down Syndrome Association of Northern Virginia. He initially spoke with a few members gathered around a kitchen table and, after much work, the group succeeded in bringing the idea to Congress.

Although a coalition of national groups ultimately made it happen, he says, “It’s really important to understand that this idea didn’t come from a think tank, an advocacy group in Washington, D.C., a lobbyist or someone with a lot of financial expertise.” (The bill was renamed the Stephen Beck, Jr. Achieving A Better Life Experience Act of 2014 in honor of Beck, a parent and leader in Down syndrome organizations who stayed actively involved in the effort and unexpectedly passed away days after the House passed the legislation.)

Hodges has learned firsthand that providing for a special needs child is “a piecemeal situation” that requires cobbling together funding from different pots including government benefits and a special needs trust. “While these [ABLE] accounts won’t be everything, hopefully it’s a big step,” he says. “They could be a good mechanism for consolidating help from other family members.” They may also enable disabled individuals to live more productive lives without losing benefits, he adds.

Pat Hammeke, who served as the Hodges family’s special care planner before retiring at the end of 2013 from the Washington Group (now known as MassMutual Greater Washington), a metro Washington, D.C.-based agency of the Massachusetts Life Insurance Company, is also happy about the passage of the ABLE Act—although Hammeke had hoped it would provide a funding cap higher than $100,000 for the accounts.

“If you have the resources, it’s something you have to do,” Hammeke says, because of the tax-free provisions. He encourages advisors to help families navigate the complex maze of government support. “The need is so great that anything you can do to promote planning for special needs families is important,” he says, noting that these families must also plan for retirement and their other children.

Hammeke, who was the director for Special Olympics in Northern Virginia for eight years, retired to North Carolina so his family could live closer to his niece, who will be the next-level guardian and trustee for his two children with Down syndrome. He hopes to use ABLE accounts to supplement living and residential expenses for his son, 32, and daughter, 37. This year, the kids will begin the process of living independently. Hammeke plans to use the ABLE accounts first and then their trusts.

Hodges expects that Audrey will want to live at least part of her life independently, either in a group home or an apartment, and he realizes she probably won’t be able to drive a car. So he hopes an ABLE account can help fund her housing and transportation expenses.

Audrey has also given some thought to her future. According to Hodges, she wants to be a nurse (like her grandma), a teacher or a superhero.