A new law just passed by Congress and signed by President Obama will allow people with disabilities who became disabled before they turned 26 to set aside up to $14,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. As things stand now, a person diagnosed with a disability generally can’t have assets worth more than $2,000 without forfeiting eligibility for government programs like Medicaid and Supplemental Security Income (SSI).
Under the Achieving a Better Life Experience (ABLE) Act, the tax-free savings accounts can be used to pay for qualifying expenses such as the costs of treating the disability or for education, housing and health care, among other things. The existence of the accounts will not compromise the individual’s ability to qualify for benefits like SSI or Medicaid as long as the account balance does not exceed $100,000.
States must set up programs for families to invest in the new so-called “529A accounts” and will provide investment options. The act takes effect at the beginning of 2015, meaning that states will have to act soon to regulate these new accounts. Once in place, ABLE accounts will become one more tool for families of people with special needs to use in order to protect their loved ones’ valuable benefits while enhancing their quality of life.
But because the accounts can hold only up to $100,000 without negative repercussions, and especially since they apply only to people who became disabled when they were young, most, if not all, families of people with disabilities will still need to consider setting up traditional special needs trusts if they want to properly care for their relatives with special needs. Many of these trusts can also be drafted to protect the trust assets from Medicaid estate recovery if they are funded with money from family members and not the trust beneficiaries.
Although it may be easy to set up an ABLE account, there are many hidden pitfalls associated with spending the funds in the accounts, both for the beneficiary and for her family members. Therefore, it is imperative that anyone thinking about establishing an ABLE account speak with her special needs planner first in order to make sure that all of the pieces of a special needs plan will properly align with the ABLE account.