Late last year, Congress passed, and the President signed, the Achieving a Better Life Experience (ABLE) Act. The act authorizes a new, tax-advantaged savings account, modeled after the Section 529 college savings account, for people who are blind or have severe disabilities. While these accounts provide many benefits, it’s important to understand their limitations. Other planning tools, such as a special needs trust (SNT), continue to offer significant advantages.

Saving for disability expenses

Like Sec. 529 accounts, state-sponsored ABLE accounts allow parents and other family and friends to make substantial cash contributions. Contributions aren’t tax deductible, but accounts can grow tax-free, and earnings may be withdrawn free of federal income tax if they’re used to pay qualified expenses. Both types of accounts enjoy some bankruptcy protection, although it appears that ABLE accounts offer no protection against the beneficiary’s bankruptcy.

In the case of a Sec. 529 account, qualified expenses include college tuition, room and board, and certain other higher education expenses. For ABLE accounts, “qualified disability expenses” include a broad range of costs, such as health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management, legal expenses, and funeral and burial expenses.

An ABLE account generally won’t jeopardize the beneficiary’s eligibility for means-tested government benefits, such as Medicaid or Supplemental Security Income (SSI). To qualify for these benefits, a person’s resources must be limited to no more than $2,000 in “countable assets.” Assets in an ABLE account aren’t counted, with two exceptions: 1) Distributions used for housing expenses count, and 2) if the account balance exceeds $100,000, the beneficiary’s eligibility for SSI is suspended so long as the excess amount remains in the account.

Limited benefits

ABLE accounts offer some attractive benefits, but they’re far less generous than those offered by Sec. 529 accounts. Maximum contributions to college savings accounts vary from state to state, but they often reach as high as $350,000 or more. The same maximum contribution limits apply to ABLE accounts, but practically speaking they’re limited to $100,000, given the impact on SSI benefits discussed above.

ABLE accounts also impose an annual limit on contributions equal to the annual gift tax exclusion (currently $14,000). There’s no annual limit on contributions to Sec. 529 accounts. Plus, although Sec. 529 contributions are taxable gifts, you can bunch five years’ worth of annual gift tax exclusions into one year. That means you can make gift-tax-free contributions up to $70,000 ($140,000 for married couples) to a 529 plan in one year.

Other ABLE account limitations and disadvantages include the following:

• The beneficiary must have become blind or disabled before age 26.
• Unlike a Sec. 529 account, you may open an ABLE account only through your home state’s program (if any) or through a program established by another state with which your home state contracts, and you’re limited to one account per beneficiary.
• Also unlike Sec. 529 accounts, an ABLE account’s beneficiary is the owner of the account. That means contributions are irrevocable and the account’s funders may not make withdrawals or change beneficiaries.
• An ABLE account beneficiary is permitted to direct the investment of contributions twice a year. If the beneficiary is a minor or otherwise incapable of making investment decisions, a court-appointed guardian may be required.

Finally, be aware that, when an ABLE account beneficiary dies, the state may claim reimbursement of its net Medicaid expenditures from any remaining balance.

An alternative option

ABLE accounts may be a good option for some families, but in many cases an SNT is the better choice. A properly designed SNT is a flexible tool that, like an ABLE account, allows you to enhance a disabled family member’s quality of life without jeopardizing his or her eligibility for means-tested government benefits.

Given the limitations of ABLE accounts, an SNT is preferable if you wish to make larger contributions, contribute assets other than cash, achieve stronger asset protection, or provide assistance to a family member who became blind or disabled at age 26 or later. It’s also a good option if your home state hasn’t established an ABLE program or contracted with another state to provide ABLE accounts to its residents.

Evaluate your options

If you’re caring for a disabled family member, it’s worth your time to look into the benefits of an ABLE account. Your advisor can help you determine whether it’s a good fit for your family, or if you’re better off using an SNT.