With overwhelming support, Congress passed the ABLE Act of 2014 (Achieving a Better Life Experience) on December 16, 2014.  The Act provides an opportunity for qualified individuals with special needs to have a tax-free savings account that will support their health and independence while preserving their means-tested government benefits. President Obama is expected to sign the legislation into law.  Some individuals with special needs, but not all, may benefit from an ABLE account.  Such an account can be useful in addition to, not in lieu of, other traditional special needs planning.
Beginning in 2015 under the ABLE Act, states may, but are not required to, develop programs enabling persons with disabilities to establish accounts modeled on the popular 529 college savings plans. Certain balances and disbursements will not be considered when establishing an individual’s eligibility for such means-tested government benefits as Medicaid and Supplemental Security Income (SSI).  Funds can be used for approved healthcare, education, housing, personal support and other care expenses.  The first $100,000 in an ABLE account will not adversely affect the individual’s eligibility for SSI.
To qualify, the onset of the individual’s disability must have occurred prior to age 26.  Only one ABLE account may be established for each qualified person with special needs. Total annual contributions cannot exceed the federal gift tax limit ($14,000 as of 2015), while total contributions from all contributors to the one account are capped at the limit established by each state for its 529 accounts ($235,000 in Mississippi). Although contributions are not tax-deductible, income earned by such accounts will not be taxed.  Funds remaining in the account at the beneficiary’s death (even funds contributed by parents, grandparents and siblings) must first be used to repay Medicaid expenses incurred.
So will an ABLE Act account be of benefit to you or your family member with special needs?  Maybe, but you must consider the following:

1. An ABLE Account is limited as to how you can spend the money in the account – more limited than most special needs trusts.
2. The ABLE Act limits how much can be contributed annually – only $14,000 from all sources to the ABLE Account – unlike special needs trusts which have no limits on contributions.
3. There may be one, and only one, allowable ABLE Account.  A person with disabilities may have more than one special needs trust established by several family members, and each such trust may be invested in multiple accounts (and may own real property as well).
4. An ABLE Account must “pay back” (reimburse) the state when the beneficiary dies, for all Medicaid and waiver services that the state paid after the date the ABLE Account was created.  This pay-back will be from all funds in the account, including funds contributed by parents, grandparents and others.  A “third party special needs trust” funded by other family members has no pay back.
5. If the amount in the ABLE Account for a beneficiary exceeds $100,000, then the beneficiary will lose his or her SSI benefits.  Not the case with either a third party or first party special needs trust, which can have an unlimited balance.  If the amount in the ABLE account exceeds $100,000, even for one day, the individual loses SSI.  The SSI payment amount in 2015 is $733 a month, $8,796 annually, and is income tax free dollars.
6. In Mississippi, the maximum that can be in an ABLE Account for a beneficiary is $235,000 (the same as for college 529 plans) or will lose Medicaid.  There is no limit for special needs trusts.
7. If there is a guardianship or conservatorship over the disabled beneficiary, and the beneficiary’s funds are going to be “saved” in an ABLE Account, then court approval will be required to establish the ABLE Account.  In most cases court approval of all ABLE Account expenditures will be required; there may be required notice to, and approval by the State, of all expenditures; there may be an additional cost of a required surety bond.  None of these limitations would apply to third party contributions when using a third party special needs trust.
8. ABLE Accounts are “tax free.”  However, the same effect may be obtained by many special needs trusts:
   1. A third party special needs trust, if drafted as a Qualified Disability Trust (QDT), has a full $4,000 exemption in 2015.  All distributions from the trust for the benefit of the beneficiary are taxed to the beneficiary, and the beneficiary could have their own $4,000 exemption and a standard deduction in 2015 of $6,300.  Therefore, with a third party special needs trust you may be able to shelter $14,300 from income tax in 2015.  An ABLE Account with $100,000 (maximum not to lose SSI) would need to earn over 14% for any income tax benefit over such a third party special needs trust.  Further, investments by the trust can be selected which produce no, or minimal, federal taxable income.
   2. For a first party “pay-back” Special Needs Trust, all income is taxed to the beneficiary at his or her rate, not to the Trust. Again, the beneficiary could have a $4,000 exemption and $6,300 standard deduction.  Therefore, no federal tax incurred until the trust income exceeds $10,300 (and then at the lowest tax bracket – 10% on next $9,225).  So, again, $100,000 in ABLE Accounts would not produce any income tax benefit over a first party special needs trust.
9. If the age of the “disability” onset is age 26 or older, the disabled individual cannot use an ABLE Account.  Many persons with a mental illness diagnosis, or traumatic brain injury, if it cannot be documented that the onset was prior to age 26, cannot use ABLE Accounts.

When does an ABLE account make sense?  It may be helpful for: (a) an individual who receives an inheritance of less than $14,000 that is not properly left to a third party special needs trust by the deceased relative; (b) an individual who receives a litigation settlement of less than $14,000; or (c) an  individual who has accumulated unspent SSI/SSDI/earnings that will push the individual’s resources over the allowable amount.  However, remember that only $14,000 may be contributed by all contributors into one account in one year.
If you would like to discuss whether an ABLE account is right for you or your loved one, contact our experienced Mississippi Special Needs Attorneys at 601-987-3000.