By Nancy Burner, Esq.
In December 2014 the federal government passed a law known as the Achieving a Better Life Experience Act, also known as the ABLE Act. This law allows family members of a disabled person to create an account that is exempt from federal income tax to be used for certain “qualified expenses” related to the person’s disability. This act is created under the same provisions of the tax code as 529 plans for college savings although they have different rules governing the plans.
Unlike the college savings plans, the beneficiary of the New York ABLE Act accounts must have been deemed disabled prior to 26 years old. If a beneficiary is entitled to Supplemental Security Income (SSI) or Social Security Disability Income (SSDI), they are automatically eligible. However, if they are not entitled to these sources of income, there are other methods of proving disability that will establish eligibility. The account can be created by any person, and the owner can be the beneficiary or their parent, legal guardian or representative of that beneficiary.
However, it is important to note that there is a maximum contribution of $14,000 annually, the federal gift tax exemption amount. Each beneficiary can only have one ABLE account created for their benefit. This could create an unintended tax liability if there is no coordination among the persons that wish to contribute to the account. ABLE accounts are meant to supplement the government benefits that a disabled person is receiving. In New York, ABLE account funds are not counted as a resource at all for Medicaid eligibility for the disable beneficiary of the account. For an individual who is receiving SSI, the account is not considered a resource as long as it is below $100,000.
The benefit of having an account like this is that the disabled individual can access the account on their own without requesting a distribution from a trustee as they would have to do with a supplemental needs trust. The accounts can be used to pay for “qualified expenses,” including but not limited to education, transportation, training, legal fees, etc. The expense must be one that is related to the person’s disability and provides them with a resource that will improve their health, independence or quality of life. If the funds are misappropriated to an expense that does not fall into this category, there is a 10 percent penalty and the full amount of the nonqualified expense will be deemed an available asset for Medicaid or SSI eligibility purposes.
Upon the death of the account beneficiary, there is a payback to the Medicaid program for services rendered. This payback includes services to the beneficiary starting on the date the account was created. If a beneficiary received services for 20 years before the account was created, there is no payback to Medicaid for the prior 20 years of services.
The ABLE Act provides a new and creative vehicle for disabled persons to have access to additional assets while maintaining their government benefits. However, these accounts are, in most cases, a supplement to traditional planning for persons with disabilities. If a beneficiary has multiple persons that wish to leave assets to them that may exceed $14,000 per year in contributions or $100,000 in total, a supplemental needs trust will be more beneficial than the ABLE account. Money that is contributed to a disabled person from a third party can go into a trust that does not require payback to the Medicaid program. If funds are given outright to the disabled person who subsequently places it into a trust, this is considered a first-party supplemental needs trust and it also requires a payback to Medicaid.
New York State signed the ABLE Act into law in December 2015. However, these accounts are not yet available to New York State residents. While the state says they may be available at the end of 2016, there is no set date for the program launch.
Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.