Wednesday, June 15, 2022
HomeFinancial AdvisorYour Special Needs Planning Toolkit: ABLE Accounts

Your Special Needs Planning Toolkit: ABLE Accounts


Congress created ABLE accounts (a.k.a., 529A plans) in 2014, then enhanced their utility for special needs planning through the Tax Cuts and Jobs Act (TCJA) in 2017. Here, we’ll take a look at some of the improvements introduced under the TCJA, the differences between ABLE accounts and special needs trusts, and how adding the ABLE account to your special needs planning toolkit can create opportunities for you and your clients.

Post-TCJA Contributions to ABLE Accounts

Annual rollovers from a 529 account to an ABLE account. Before the TCJA, a 529 account could not be rolled over to an ABLE account. This meant a potential loss of the tax advantage for 529 accounts that families funded for children whose disability manifested later in life.

By allowing annual rollovers from a 529 account to an ABLE account in amounts up to the gift tax exclusion ($15,000 for 2021), the TCJA permits a tax-advantaged account to be used for disability-related expenses instead of qualified education expenses.

Beneficiary earnings contributions. ABLE account beneficiaries can contribute their earnings to their own accounts if they or their employer are not contributing to a retirement plan.

The cap on beneficiary earnings contributions is the annual federal poverty level for a one-person household ($12,880 for 2021). The beneficiary’s contributions are separate and in addition to his or her family’s annual contributions. Like rollovers, the limit on separate contributions is the annual gift tax exclusion.

Eligibility for Tax Credits

Retirement Savings Contributions Tax Credit eligibility. Beneficiaries who make contributions to their own ABLE accounts—as opposed to contributions made by others (e.g., friends, family)—may be eligible for the Retirement Savings Contributions Tax Credit (a.k.a., Saver’s Credit).

Of course, additional requirements must be met, and more detailed information is available on the IRS website.

Special Needs Trusts Vs. ABLE Accounts

ABLE accounts and special needs trusts have a common purpose: to supplement rather than supplant benefits and services provided by programs like Medicaid and Supplemental Security Income (SSI). Both are exceptions to the stringent asset rules that limit eligibility for public benefits.

Aside from this similarity, however, there are some definite and nuanced differences.

Special Needs Trusts

special needs trust is a legal document an attorney drafts to suit the needs of the grantor.

Types of trusts. first-party or self-settled special needs trust holds assets initially owned by the beneficiary. Circumstances in which the beneficiary owns the assets include awards in medical malpractice lawsuits and direct inheritances. First-party trusts are always irrevocable and established during the beneficiary’s lifetime.

third-party special needs trust, on the other hand, holds assets contributed by the beneficiary’s family or friends. Third-party trusts can be revocable or irrevocable, but the most common type is created by a testamentary bequest in a parent’s or grandparent’s last will and testament.

Guidelines. Several general guidelines apply to first-party and third-party special needs trusts.

  • A first-party special needs trust must be established before the beneficiary’s 65th birthday.

  • There is no age restriction for the beneficiary of a third-party trust.

  • The same beneficiary can have a first-party and a third-party special needs trust or more than one third-party trust.

  • A beneficiary can remain eligible for SSI regardless of the amount in the special needs trust as long as distributions from the trust adhere to specific rules for in-kind support and maintenance.

  • Any asset, including real estate, can be transferred to a special needs trust.

  • First-party special needs trusts must include terms sometimes called “payback provisions.”

    • These terms require that any assets remaining in the first-party trust be paid back to the state Medicaid agency up to the amount of benefits the beneficiary received during his or her lifetime.

    • Because of Medicaid payback rules, it may not be advisable for a first-party special needs trust to hold real estate (e.g., a family home). Remainder beneficiaries will receive any assets remaining after the Medicaid payback.

  • Third-party special needs trusts are not required to have payback provisions. Assets remaining in a third-party trust can be distributed to remainder beneficiaries without an initial repayment to a state Medicaid agency.

ABLE Accounts

Enrollment in an ABLE account is as easy as opening a 529 plan. The administration fees are low, and investment managers offer a range of conservative and aggressive investment options for states’ programs.

It’s important to keep in mind that most states do not have an income tax deduction for contributions to an ABLE account. Plus, the five-year up-front gifting option often used to fund 529 accounts is not available for ABLE accounts. Not all states have ABLE accounts, but some states do allow nonresidents to enroll in their programs. (The ABLE National Resource Center has a tool that compares state ABLE programs and shows whether nonresidents can enroll.)

Guidelines. Here are the guidelines that apply to ABLE accounts:

  • The onset of an ABLE account beneficiary’s disability must occur before age 26.

  • A beneficiary can have only one ABLE account.

  • Only cash can be contributed to an ABLE account.

  • An ABLE account balance in excess of $100,000 will affect the beneficiary’s SSI eligibility.

  • Like first-party special needs trusts, after the beneficiary’s death, the state Medicaid agency will recoup an amount up to the benefits provided to the beneficiary.

Similarities and Differences

Federal law. First-party special needs trusts and ABLE accounts share two characteristics set by federal law.

  • First, there can be only one beneficiary of a first-party special needs trust or an ABLE account.

  • Second, assets remaining in either a special needs trust or an ABLE account when the beneficiary dies must be repaid to the state’s Medicaid agency if the beneficiary received Medicaid during his or her lifetime (a.k.a., the “payback”).

    • It’s not as onerous for a first-party trust since the beneficiary initially owned the assets.

    • For an ABLE account, though, the state Medicaid agency can take assets originally owned and contributed by a family member or friend.

A third-party trust can have remainder beneficiaries and is not subject to the Medicaid payback.

Distributions. Distributions from ABLE accounts and special needs trusts can be used for a variety of expenses, including education, health care, employment training, and assistive technology. But the Social Security Administration has specific rules regarding how a special needs trust can be used for a beneficiary who receives SSI.

  • The Social Security Administration will reduce a beneficiary’s monthly SSI payment if distributions are made from a special needs trust for in-kind support and maintenance (e.g., food, mortgage, property taxes, rent, heating fuel, gas, electricity, water, sewer, and garbage removal).

  • In contrast, ABLE accounts can be used for all in-kind support and maintenance expenses—except food—if the distribution is paid to the mortgage company, landlord, or utility company in the same month. For example, if a distribution is made in June to pay rent, it should be paid to the landlord in June.

Special Needs Planning Strategies

Now that we’ve covered ABLE accounts versus special needs trusts, let’s come back to common planning strategies for your clients.

Reviewing existing accounts. A good place to begin is determining whether there is an existing 529 account. If there is, consider using the TCJA to begin rolling assets to an ABLE account.

The benefits of incorporating ABLE accounts. Next, discuss how to use an ABLE account to complement a beneficiary’s special needs trust. You should also consider whether a grandparent’s or parent’s assets will be forfeited through mandatory payback provisions.

Intergenerational planning opportunities. Since first-party special needs trusts hold assets owned initially by the beneficiary and have specific limitations, financial planning for other family members will not be a primary factor when establishing that type of trust. Helping clients integrate a third-party trust and an ABLE account into a family member’s special needs plan can be a meaningful intergenerational planning opportunity.

  • A grandparent’s testamentary third-party trust will enable a special needs grandchild to enjoy lifetime benefits and for other grandchildren to be remainder beneficiaries.

  • Meanwhile, parents can contribute annual gifts to the ABLE account in an amount that fits their overall estate plan.

  • Plus, their child can take pride in contributing his or her own income to the ABLE account as provided by the TCJA. As the balance of the account increases, parents can stop their contributions while their child continues to add his or her own income to the ABLE account.

Consider Adding ABLE Accounts to Your Toolkit

Changes to the tax code have given families and financial planners several tools to aid in comprehensive special needs planning. With some thought and strategy, you can use all of the options available to distribute family assets and to enhance the quality of life for a special needs family member.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments