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The ABLE Act: Not ready for Prime Time

In December, 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act, with the aim of providing another financial tool for families with a disabled or special needs child. However, the bill was watered down significantly... 

since it was originally proposed, so that it will not be as attractive or as useful as originally envisioned. Moreover, it cannot be used until the states enact implementing legislation, and that will undoubtedly take some time. In brief, the Act allows states to set up rules for accounts similar to 529 accounts, but for the purpose of providing for disabled or special needs family members. Like 529 accounts, the funds in the new ABLE accounts will grow tax free. Also, a beneficiary who receives Medicaid or Social Security Insurance (both of which are available only to a person with minimal income and assets) will not become disqualified because there is money in an ABLE account for his benefit. So a parent, grandparent or sibling of a disabled or special needs individual can contribute to this ABLE account to supplement the governmental benefits that he receives. However, the final legislation has some drawbacks. First of all, the maximum contribution in any calendar year is $14,000, and the individual can have only one ABLE account. So this account cannot be used for a large inheritance or a large gift from any family member. Secondly, the account is subject to "estate recovery," which means that when the individual dies, any money left in his ABLE account must be first used to repay the state for the governmental benefits that he has received. Finally, these accounts are only available for individuals whose disability began before they reached age 26. A person who was disabled by an accident, stroke or other incident after age 26 cannot take advantage of this program. Given these limitations, it appears that Special Needs Trusts will continue to be the best tool to provide for children with disabilities or special needs. A Special Needs Trust (SNT) can be established with contributions from family members or others, or by an inheritance, without disqualifying the beneficiary from any governmental benefits. There is no limit to the amount that can be contributed to a SNT, and when the beneficiary dies, any remaining funds will be distributed in accordance with the terms of the trust. It is not subject to "estate recovery," so the state cannot seize the balance to repay Medicaid. But be careful; the IRS and state agencies are diligent about SNTs, and if it is not properly drafted the individual could be disqualified from benefits. Consult with one of our attorneys regarding creation and maintenance of a Special Needs Trust for your family member.

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