The world changed this year for individuals with developmental disabilities. For the first time since the legislation that created Supplemental Security Income in 1972, individuals with developmental disabilities will be able to have an investment account that they can control that can hold more than $2,000 without disrupting benefits. Three states have made it possible for individuals to have ABLE Act accounts. More are sure to follow soon.
Nebraska, Tennessee and Ohio are the first three to offer ABLE accounts. Legislation says that you have to use the state plan where the account owner resides, unless that state does not offer a plan. So if you live in Colorado, you can use any of the three plans available right now. Colorado, where I live, is working on getting their ABLE plan up and running soon.
These accounts represent a big step towards a greater degree of independence for people with development disabilities. Until now, those with any assets had to have them sheltered in a trust and their financial decisions were made by the trustee. For many, this will still be the place to keep significant assets as the ABLE Act accounts have some drawbacks but for the first time a person with special needs will have a degree of control and input about finances.
Working people with special needs were faced with a dilemma, spend all the money they earned or save it and risk losing benefits. ABLE Act accounts, handled well, allow people who work for income, dignity and community participation to have reserve funds to spend as they wish, when they wish.
The ABLE Act was passed by both houses of Congress and then signed into legislation by President Obama on December 19, 2014. It has a taken more than a year for the rules to be passed and for states to get the infrastructure in place to offer accounts to individuals. There are seven key concepts to know about the ABLE Act accounts:
- ABLE Act accounts are tax-free savings and investment accounts. Income and dividends are not taxed while money stays in the account and qualified distributions are not taxed as the money comes out. These are like Roth IRA and 529 plan accounts in their tax structure.
- ABLE Act accounts can be opened on behalf of a person with a qualified disability who has become disabled before the age of 26. The disability must meet the standards of SSI and SSDI. These standards and required documentation will be further explained as the Treasury Department drafts the rules covering the ABLE Act.
- An individual can have one ABLE account for his or her benefit.
- Accounts can be used to pay for “qualified disability expenses.” Right now, this is a broad definition that can include education, housing, transportation, assistive technology, health-care, legal, financial and other expenses for the person with special needs. The rules governing payments will be outlined next year in more detail.
- There are limits to contribution amounts. ABLE Act accounts cannot receive more than $14,000 in any calendar year without paying a tax on the contributions. The contribution amount is indexed for inflation.
- Accounts may have unlimited funds in them but any funds over $100,000 will suspend SSI benefits until the account is under $100,000. Amounts over $100,000 will not suspend or affect Medicaid eligibility.
- Medicaid is the primary contingent beneficiary of an ABLE account for repayment of expenses.
ABLE Act accounts still need to be handled well. Too much money in these accounts can lead to a loss of SSI income. Distributions that conflict with Medicaid rules can also lead to a loss of benefits.
These accounts do not replace Special Needs Trusts or Pooled Income Trusts in planning. They are a third option and I think have specialized use as some of the drawbacks, like the ones leading to a loss of benefits, are not worth the risk. On the other hand, I know I want my daughter to understand how to save, spend and invest her money and an ABLE Act account can be a great vehicle for that.
Sit down with your investment, tax and legal team before opening an account. Call or email me with questions or set a time to meet. Also, we will start the Blueprints workshops in September so be on the lookout for those announcements soon.
Rob Wrubel CFP®, AIF®, is a Senior Vice President – Investments with Cascade Investment Group, member FINRA & SIPC. Rob is also a father of a daughter with Down syndrome. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.719-632-0818
