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How ABLE Accounts Benefit Your Clients

Updated: Dec 9, 2020

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ABLE accounts offer many benefits.

Let’s say you have a disabled child. Before an ABLE account existed, the only way you could ensure they would be cared for as an adult was by setting up a Special Needs Trust.

First, the basics of a trust, which has three parties. There is the Trustmaker, or Grantor. This is the person who starts the trust. Then there is the Trustee, who controls the assets. Finally, we have the beneficiaries. These are the persons who reap the fruits of the trust.

There are also revocable and irrevocable trusts. The former is best explained by using the example of a revocable living trust (RLT). These are created by the Grantor, who is usually the Trustee. An RLT is usually used to avoid probate. Probate is a process that is different in every state, but the rule of thumb is an RLT doesn’t go through it, and the assets contained within the trust pass to the beneficiaries by an act of law. The taxpayer in an RLT is the Grantor.

An Irrevocable Trust is different. The grantor is not the Trustee, and, in most states, the trust assets are protected from creditors and the like.

Back to Special Needs Trusts: These are set up by parents, who contribute the gift tax limits. Usually, if there are other siblings, they will become the Trustees.

A Special Needs Trust is irrevocable. In other words, unlike a revocable trust, it cannot be changed. With an irrevocable trust, if you are an estate planner, the trust removes the assets from a taxable estate.

As I alluded to earlier, these trusts were rather problematic. For instance, if you had another child, they would be named the Trustee in the event of your passing. I am one of eight kids, and let me tell you, jealousy can be a real issue. Remember sibling rivalry? We all want to believe our kids will do the right thing. However, this isn’t always true.

Another downside: When the beneficiary applies for disability, the Trust is taken into account, and the amount of money is held against them.

Congress authorized ABLE accounts in the Achieving a Better Life Experience Act of 2014. Supporters of the law pointed out that the U.S. Tax Code provided significant tax benefits to parents who save money for their children's college education in 529 plans, which are named for the section of the law that describes them.

But the parents of people with disabilities had no similar way to save for their children's future needs, such as occupational therapy or assisted living. Further, families who did try to save money for such things often ended up costing their children access to government assistance. The ABLE Act amended Section 529 in an effort to correct this.

Although the federal tax code allows for ABLE accounts, it's up to the states to actually set up and administer the programs, just like with 529 programs. When you contribute money to the latter, the state invests the money on your behalf. Unlike with a typical IRA or 401K, you can't dictate how it is invested outside of making choices as to how aggressive or conservative you want to be, within limits.

As of 2018:

  • An individual can contribute up to $15,000 a year to any ABLE account

  • A disabled individual can be named as the beneficiary of only one ABLE account

  • The person must have been blind or disabled before age 26 to qualify

  • The contributions may be able to qualify for the Saver's Credit

  • There are tax benefits with ABLE accounts

Contributions to an ABLE account are not tax-deductible, but all investment earnings remain untaxed as long as money taken from the account is used for "qualified disability expenses." These include, among other things:

  • Medical treatment

  • Education, tutoring and job training

  • Special needs transportation

  • Assistive technology

  • Housing

  • Legal and administrative fees

As with education 529 plans, taxes apply if money is withdrawn from an ABLE account for something other than qualifying expenses. Usually, the beneficiary will have to pay income taxes on the portion of the withdrawal that consists of investment earnings, as opposed to contributions. In addition, a 10 percent tax penalty will apply.

A key feature of ABLE accounts is that the first $100,000 is not treated as a personal asset. This is important, because federal law generally bars individuals from receiving assistance such as Medicaid, housing aid and Supplemental Security Income if they have more than $2,000 worth of financial assets.

Severely disabled individuals often need these government services, especially after their parents die or can no longer care for them. Advocates for the disabled have long argued that the $2,000 cutoff effectively punished those whose families planned ahead. The ABLE account is a positive step towards rectifying this.

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