Special accounts for the disabled
Q. I’ve heard there’s a new kind of 529 plan that can be used for disabled people — specifically for their long-term care. Is that true? How does it work?
A. It’s not exactly a 529 plan, but there is a new kind of account that’s similar in some ways, specifically meant for those with disabilities.
President Barack Obama signed the Achieving a Better Life Experience (ABLE) Act on Dec. 19, 2014 as part of the Tax Increase Prevention Act of 2014.
This federal law allows qualified individuals with disabilities to have tax-free savings accounts in which they can save up to $100,000 without jeopardizing eligibility for Supplemental Security Income (SSI) and other means-tested government programs such as Medicaid, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
She said while SSI benefits will be suspended for individuals whose accounts are in excess of $100,000, Medicaid benefits will continue.
Modeled on 529 college savings plans, interest earned on savings is income tax-free, Whitenack said. Contributions to the account, however, will not be tax-deductible.
Here’s how ABLE accounts are different from 529 plans.
“The funds in the accounts can be used to pay for education, health care, transportation, housing and certain other expenses,” Whitenack said. “To be eligible, individuals must have a disability that occurred before age 26.”
Whitenack said unlike 529 plans, each individual with disabilities may have only one ABLE account.
Annual contributions are capped at the federal annual gift tax exclusion, which is $14,000 in 2016, Whitenack said.
Funds remaining in the account when the account beneficiary dies must first be used to repay Medicaid for expenses it incurred on behalf of the beneficiary, she said.
Whitenack said as of 2015, states have the option to offer such plans to people with disabilities. States will have to adopt regulations, however, before financial institutions can offer such plans.
“Although New Jersey passed a law in January 2016 to offer such plans, no such plans are available yet in this state,” she said. “Ohio is the only state in the country that currently offers such a plan. New Jersey residents can open an Ohio STABLE account.”
Whitenack said that while the ABLE Act offers another tool that can be used in planning for the special needs of certain individuals, the establishment of first and third party special needs trusts should be considered when the contributions will exceed the amounts allowed under the Act or when third parties do not want their assets to be subject to a Medicaid payback requirement.