Indiana’s legislature is currently considering how it will implement the Achieving a Better Life Experience Act of 2013, more commonly known as the ABLE Act. Families of those with developmental disabilities are familiar with the conundrum of contributing to a loved one’s financial security without disqualifying that person from Medicaid and/or SSI by exceeding resource limits. The ABLE Act was created to encourage families to invest in their loved one’s future without jeopardizing their Medicaid and/or SSI eligibility.
The ABLE Act became a Federal Law in 2014, and is now in the process of being implemented by individual states. Each state’s implementation may be slightly different. Generally, ABLE accounts will be treated similarly to 529 college education plans. A donor invests in the recipient’s account, and as long as the contribution is less than the annual gift tax exclusion (currently $14,000) the donor avoids incurring the gift tax. The account’s earnings are not taxed. Contributions are not deductible for federal income tax purposes.
If the funds accumulated are used for “qualified purposes,” the distributions will not be treated as income to the recipient. “Qualified purposes” will include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, and other administrative expense, though these may vary slightly by state. Funds used for non-qualified purposes will be taxed as income to the recipient, and a penalty will be assessed. ABLE account balances up to $100,000 are not counted towards the resource limit for Medicaid or SSI purposes, but once the ABLE account exceeds $100,000, SSI benefits are suspended until the balance drops below $100,000. When the account owner dies, Medicaid is entitled to be reimbursed for funds expended on behalf of the owner during their lifetime. Once Medicaid is reimbursed, any remaining funds can be distributed to designated beneficiaries.
ABLE accounts can only be created for persons who received a disability diagnosis prior to turning 26-years old. Individuals who receive SSDI or SSI and were diagnosed with a disability before turning 26 are eligible. If the person with a disability does not receive SSDI or SSI, a disability certification process is available to confirm eligibility.
It does not appear likely that Indiana will have its implementation of the ABLE Act completed in 2016. As is the case with most states, 2017 appears to be a more realistic target date for investing in ABLE accounts in Indiana. Nonetheless, for families considering this option, planning should begin now. It is important to weigh the costs and benefits of funding an ABLE account against the costs and benefits of using a special needs trust or a 529 plan. For instance, while special needs trusts are more expensive to create and administer, special needs trusts can be formed so that they are not subject to Medicaid reimbursement upon the death of the intended beneficiary. Additionally, a special needs trust can have a balance in excess of $100,000 without negatively impacting the Medicaid or SSI eligibility of the intended beneficiary. If the person with a disability is a child who is likely to pursue higher education, a 529 plan is likely to be an important component of the long-term financial plan that should be considered as well.
At Slotegraaf Niehoff, P.C., we will be watching developments with Indiana’s implementation of the ABLE Act closely so that we can help our clients make wise choices in light of this new law. If you would like to learn more in the context of your particular circumstances, please do not hesitate to schedule an appointment.