Families with disabled children face a host of obstacles in ensuring the long-term care of their loved one. There are tools and resources available to help facilitate that care for the future. One potential tool is known as an ABLE account. In 2014, Congress enacted a law allowing qualified individuals to establish ABLE (Achieving a Better Life Experience) Account. These accounts give favorable tax treatment to contributors and beneficiaries, alike. Families of children who suffered a disabling condition prior to the age of 26 should consider creating an ABLE account.
As of this post’s publication, Wisconsin does not have its own ABLE account program, but Wisconsin residents may establish an ABLE account through another state’s program. Minnesota launched its own ABLE program at the end of January 2017.
How Does an ABLE Account Work?
An ABLE account allows for the payment of disability related expenses for a designated beneficiary. The disabled person is the owner of the account, as well as the beneficiary. Contributions to the account are considered tax-exempt gifts, though they are limited on an annual and lifetime basis. Qualified distributions to the beneficiary are not considered taxable income. Beneficiaries can use these accounts to pay expenses related to their disabilities, including:
- Health costs
- Prevention and wellness
- Employment training and support
- Assistive technology
- Personal support services
- Other expenses
In addition, ABLE accounts can be used to cover expenses incurred in monitoring and overseeing the account itself.
What Is Special About an ABLE Account?
Perhaps the most beneficial aspect of these accounts is the way they interact with other assistance programs. Some federal programs are means-tested. That means that eligibility for benefits is dependent on the assets and income of the disabled person. ABLE accounts can help beneficiaries maintain their access to means-tested programs while covering expenses that these programs may overlook. The inclusion of housing expenses, in particular, can help a beneficiary maintain a reasonable standard of living while still qualifying for Supplemental Security Income (SSI), Medicaid, SNAP and other benefits.
Who Can Contribute to an ABLE Account?
Contributions are not limited to family members. Beneficiaries are eligible to make contributions, as are trusts, estates, businesses and unrelated individuals. The annual limit for a tax-free contribution is based on the gift-tax exemption, currently $14,000 per year. The lifetime contribution limit varies by the state offering the plan.
It should be noted that all contributions must be made in the form of cash or a cash equivalent. ABLE accounts cannot accept contributions of stocks, bonds, real estate or other non-cash assets.
ABLE accounts share certain similarities with Section 529 education plans. Like 529 plans, they can be established in any state offering them, not just the state in which the account owner resides. Relatively few states offer ABLE plans at this time, but the number is likely to grow as more states consider the benefits of these accounts. Choosing the best state in which to start an ABLE account is an important decision. The maximum contribution limit, as well as the amount and type of expenses incurred by a beneficiary will dictate which plan is best.
Drawbacks to ABLE Accounts
When used properly, ABLE accounts are a valuable tool for disabled beneficiaries. The misuse of an ABLE account, however, is not without its problems. As these accounts are relatively new, there are unknowns when it comes to qualifying beneficiaries and proper management. Improper distributions, such as those for non-qualifying expenses, are considered gross income.
In addition, the IRS penalizes the income portion of improper distributions at 10 percent. That is a relatively minor penalty, but it does make the lack of guidance surrounding covered expenses problematic.
The only other drawback to these accounts is the administrative burden of tracking and categorizing expenses, properly identifying contributors and processing disability certifications. An experienced legal professional can provide the necessary assistance to overcome this obstacle.
If you have any questions about ABLE accounts and how you can create a plan, please contact the Kosa Law Office by calling 715-386-4125 or by reaching out online.