WHEN SHOULD YOU CONSIDER AN ABLE ACCOUNT?
An ABLE account should only be used as a secondary tool, NOT as a replacement for proper special needs planning and a special needs trust.
There are many legal reasons behind this conclusion. First and foremost, you cannot name a beneficiary on death. Most state Medicaid programs that provide medical assistance and/or “waiver” services for you/your child are entitled to the “payback” of all claims as reimbursement upon the death of the ABLE account owner (which must be the person with a disability). This payback is payable from all funds remaining in the ABLE account, including donations into the account from third parties.
One red herring that trips up many families is the fact that funds in an ABLE account grow “income tax-free,” at least for federal income tax purposes. However, in reality few individuals who receive public benefits actually pay any income tax.
Importantly, every transfer to an ABLE account by a third party QUALIFIES as a present interest gift for purposes of the federal annual gift tax exclusion. Each year one must stay under the gift tax exclusion of $14,000 to avoid the gift tax.
Also importantly, if in MA you ever deposited more than $15,000 in one (1) year, say $15,001, then the entire account loses its exempt status, and the entire account is deemed an available resource to disqualify you/your child for benefits. Also, any amount over $100,000 in an ABLE account will count toward the individuals $2,000 resource limit for SSI eligibility and will cause SSI payments to stop until the account balance drops below $100,000.
In Massachusetts, Fidelity manages the program, and you can only choose from eight (8) possible investment choices, including one (1) that is a 100% money market option.
One possible use for an ABLE account is to stow away money to be used for food and/or housing. Using money located in a Special Needs Trust for food and housing creates a risk that all of the money in the Special Needs Trust is then seen as an asset, an available resource to disqualify you/your child for benefits. However, under the ABLE rules, food and housing are considered qualified expenses, and therefore money in an ABLE account can be used for those expenses.
MONEY IN AN ABLE CAN ONLY BE USED FOR QUALIFIED EXPENSES. If it is used for non-qualified expenses, you will then pay income tax and a 10% penalty. Qualified expenses are very specific and limited, which include BASIC living expenses, education, housing, transportation, employment training, assistive technology, personal support services, healthcare, financial management and administrative services.
Each state has different rules around these accounts, which are complex and need to be followed carefully. If you or your child qualify for an ABLE account, it is important that you speak with an attorney with extensive special-needs planning experience.