ABLE Accounts Now Available in PA
ABLE Accounts: A Primer
ABLE accounts (“Achieving a Better Life Experience”) are an opportunity now available to many disabled Pennsylvania residents, including families and friends wishing to contribute funds to assist those disabled persons. These accounts fit a niche market: situations where the contributed funds are minimal enough that a full-blown Special Needs Trust is not appropriate, and the family (or individual) wishes to retain control that would be otherwise sacrificed in a Pooled Trust. They are a nice addition to the tools available to disabled individuals and their families.
What is an ABLE Account? Section 26 U.S.C. 529A to the Internal Revenue was created as part of the Tax Increase Prevention Act of 2014 (P.L. 113-295), and authorized in Pennsylvania by Senate Bill 879 of 2015, with such accounts at least partially modeled after the more well-known 529 College Savings Plan accounts. They permit disabled individuals, or other persons wishing to benefit such disabled individuals, to contribute funds to an account for a blind or disabled individual, with such account balance not affecting the disabled person’s eligibility for federal or state public benefits, provided that such accounts meet certain requirements. Qualified distributions for the benefit of the disabled individual are tax-free to the individual and donor, provided they are made for “qualified expenses”, including housing, transportation, health, wellness, and education.
How do ABLE Accounts work? Properly structured, an ABLE account should not disqualify the designated beneficiary from federal benefits (SSI, Medicaid) or state benefits (SNAP benefits, Medical Assistance), and the account’s internal taxable gains and distributions should be free of federal and state taxes. An ABLE account can be established by the disabled individual, or any other person, such as parent, guardian, representative payee, or trustee of a trust for the benefit of the individual. Only one such account may be established for the disabled individual. The individual must be blind or disabled under the Social Security Act guidelines, specifically unable to participate in any substantial gainful activity for a period lasting longer than 12 months or if such disability is likely to result in death. Such disabling condition must have occurred prior to the age of 26 years of age. The total value of such account must be less than $100,000, or public benefits will be suspended until the account balance returns to below $100,000. Contributions to such account must be less than the annual exclusion amount ($14,000 in 2016) total, and the contributions can be only cash-based. Further reading suggests that contributions in excess of $14,000 total may actually be made, but any individual doing so must report such gift on an individual gift-tax return, as is generally required in other circumstances. The PA act provides that upon the death of the disabled individual, the balance of the account is payable to the estate of the disabled individual, and does not provide for payback to the Commonwealth. Further, the balance of ABLE accounts may be withdrawn and rolled over into an ABLE account for another person in the same family. (This probably would come up most often if the disabled individual were to leave the state, and a new ABLE account in a new estate needed to be established.) “Qualified Withdrawals” are tax-free to the disabled individual, provided: (1) the withdrawals occur in the state of residence of the disabled individual; (2) payable for benefit of disabled individual for housing, transport, health, wellness, and/or education. Non-qualified withdrawals are subject to federal income tax, PA income tax, and a 10% penalty.
When should ABLE Accounts be used? Obviously, the $100,000 threshold limits the use of these accounts to situations where the actual amounts to be distributed are somewhat minimal, or likely to be used on an ongoing basis. They do not do well for large settlements or lump sums. However, they provide an enhanced degree of self-determination for lower amounts when a Pooled Trust is not desired and a full-blown Special Needs Trust is cost-prohibitive or otherwise inappropriate. Going forward, in an era where early diagnoses of Autism are increasingly prevalent, they can provide a good solution for family members wishing to contribute to the well-being of a disabled individual (especially younger individuals). They may also serve a useful function in smaller litigation settlements for disabled persons. Finally, and importantly, they may provide an effective end-around for the receipt of smaller lumps sums by individuals over the age of 65 (who are barred (federally) from contributing to first-party Special Needs Trusts and (in PA) from contributing to Pooled Trusts).
Bottom line: this legislation is new, federally, and even newer in Pennsylvania. Changes will occur as clients and practitioners gain footing toward this new tool for special needs planning. The information above may change and be revised. But the takeaway, today, is that a new option exists for our special needs clients and their families.