Pennsylvania now has an ABLE account program created by the Pennsylvania Achieving a Better Life Experience (“ABLE”) Act. The ABLE program allows for a different type of planning to provide for the supplemental needs of individuals who are disabled. The ABLE Act was based on the federal ABLE account program and the analogous Internal Revenue Code section 529 college savings accounts.
Creating an ABLE Account
ABLE accounts may only be created for a person whose disability existed prior to reaching the age of twenty-six, even if the account is not created until later.
The ABLE account may be created by the disabled person, who is the beneficiary of the account. If the beneficiary is competent, there is no need for a trustee or representative. If the beneficiary is a minor or lacks capacity, then the parent, guardian, or person holding a power of attorney for the beneficiary will need to create the account. The beneficiary may contribute his or her own funds to the ABLE account, and friends and family of the beneficiary may also contribute. Funds gifted from others must be deposited directly into the ABLE account to preserve benefits eligibility; the gifts may not be given to the beneficiary outright. There may only be one account per beneficiary.
The maximum contribution amount per year from all contributors is currently set at $14,000. This limit is tied to the annual gift tax exclusion amount, although the difference between gifting and contributing to an ABLE account is that the $14,000 limit is not the cap per person; it is the total cap per year, from all contributors, per account.
To create an ABLE account, there must be a minimum initial contribution of $25. There is a $45 or $60 per year fee (depending whether you opt for e-delivery of statements) for all ABLE accounts. Like any bank account, some additional bank fees and account requirements may apply. For example, there is a $2.00 monthly service fee if the beneficiary opts for a debit card checking account through Fifth Third Bank.
The maximum amount permitted to be in the ABLE account is $511,758, which is the same limit as a 529 college savings account. After the maximum amount is in the account, interest can still be earned, but no more contributions may be made until the total falls below the maximum amount.
Benefits of an ABLE Account
The greatest advantage to having an ABLE account is that the account funds preserve the beneficiary’s eligibility for benefits, including Medicaid and SSI, with some notable SSI exceptions: (1) income from the beneficiary’s job is a countable resource for SSI purposes even if directly deposited into the ABLE account; (2) any amount in the ABLE account exceeding $100,000 is countable for SSI purposes (even though the account may hold up to $511,758 in total); (3) funds which are withdrawn and not used in the same month of withdrawal are countable resources for SSI purposes.
ABLE account funds are protected from creditors of the beneficiary. In addition, upon the beneficiary’s death, any outstanding qualified expenses and funeral or burial expenses may be paid tax-free from the account. After that, the account will be paid to the beneficiary’s estate, which is both subject to income tax and reachable by creditors. In Pennsylvania, the Department of Human Services may seek repayment for certain Medicaid expenses if the beneficiary was age 55 or older.
There are multiple investment options for funds in an ABLE account, ranging from conservative to aggressive investment approaches. One of the major benefits of an ABLE account is that all of the investment growth of the funds occurs tax-free.
How are ABLE Accounts Different from a Supplemental Needs Trust?
ABLE accounts can be much simpler than special needs trusts, while still maintaining benefits eligibility and creditor protection. There are first-party and third-party supplemental needs trust options, which have different rules and have specific requirements. However, there are limitations of ABLE accounts, and certain goals may be better achieved using a supplemental needs trust. For example, if an amount greater than $14,000 per year is needed to supplement the beneficiary’s needs, an ABLE account will not be sufficient. A supplemental needs trust does not have a cap on the maximum amount contributed per year or the maximum total funds in the account. SSI benefits will not be affected even if the trust funds exceed $100,000, provided that allowable distributions are made.
Supplemental needs trusts allow for the contributor to choose the trustee, who will have decision-making authority and may be better suited for making financial decisions that will comply with the appropriate legislation to preserve eligibility. This is especially true for testamentary bequests to disabled beneficiaries in a contributor’s will, since the beneficiary’s physical and mental condition at the time of the contributor’s death will likely be unknown at the time the contributor’s will is executed.