ABLE Accounts seem to be here to stay.
ABLE stands for Achieving a Better Life Experience. ABLE Accounts are financial accounts through which someone with special needs can spend money for many things that will enhance the person’s quality of life.
In Ohio, where I practice, they are called STABLE accounts. The ST stands for State Treasurer. (A politician can’t help but put his/her name on something.) Oddly, Ohio is one of the leaders in the U.S. in making ABLE accounts available. Ohio is the first state to make them available
These accounts are “special” accounts for people who have disabilities. They receive favorable tax treatment and will not (in most instances) impact the person’s government income (SSI) and health (Medicaid) benefits. In exchange for the tax treatment and lack of impact on government benefits, these accounts will have a number of limitations, so the politicians’ words “enhance the quality of life” and the “better life experience” are bits of puffery.
To be sure, ABLE Accounts will be useful. In fact, there is one particular use of these accounts that is quite a big step forward. Still, despite the highfalutin words of Congress, an ABLE account is not a panacea.
I’ve discussed ABLE accounts before. The February 2, 2015 installment described the federal legislation that created the ABLE account. The April 17, 2015 installment discussed how an ABLE account can be used to help qualify for SSI (Supplemental Security Income) and for Medicaid.
The person who owns the ABLE account must be disabled or have been disabled before age 26. There is talk of raising the age, but nothing has happened yet.
The person can have only one ABLE account. Not one per state per person – only one per person, nationwide.
Anyone can contribute to an ABLE account. The total of ALL contributions cannot exceed $14,000 per year. This number is pegged to the amount of a gift that does not trigger the requirement to file a gift tax return. As the gift tax exclusion goes up with inflation, so will the ABLE account maximum contribution amount. Unlike the gift tax exclusion, however, the ABLE account deposit isn’t on a per person basis. The maximum is per account per year, not per donor to the account. For example, if Dad deposits $14,000 into child’s ABLE account in January 2017, no one can give anything more to the account until 2018. Deposits are NOT tax deductible, though.
If an ABLE account holds more than $100,000, SSI will be shut off until the value falls back below $100,000. Medicaid will not be shut off, though. With a maximum contribution of $14,000 (unless interest rates really jump or the stock market takes off,) it will be seven years before any ABLE account gets to that amount.
Whatever is left in the ABLE account when the person dies will go to pay Medicaid first (up to the amount that Medicaid spent on the person.) If the person relies on Medicaid for health costs, he/she should not allow the ABLE account to accumulate.
Money in a ABLE account can grow tax-free. (It’s sort of like a Roth IRA that way. The initial deposit isn’t pre-tax money, but the growth of the money in the account is tax-favored.) In fact, if the contents of the ABLE account are spent on disability-related expenses, the growth isn’t taxed. If, though, ABLE funds are used to pay some expense that is NOT disability-related, there’s a 10% penalty on that expenditure. It’s important to take great care when spending ABLE funds.
Ohio’s STABLE account can be invested in mutual funds or in a checking account. There are different mutual fund choices to allow for aggressive investors or cautious investors. (Remember that the ABLE account is a Medicaid-payback account, so these mutual fund options are attractive only to someone who is sure that he/she will NOT rely on Medicaid for care. I suspect that only a few people who are eligible to open ABLE accounts can fairly expect not to use Medicaid.) Because of the likelihood that many or even most people may come to depend on Medicaid during their lifetimes (becuase of the likelihood of people needing long term care,) I cannot stress how bad an idea it seems to allow an ABLE account to accumulate above one’s near-term needs. (Use, if possible, a Wholly Discretionary Trust if trying to allow accumulation of the money.
An ABLE Account is going to be almost as easy to use as a checking account. It can have a debit card as well. Because expenditures from the ABLE account lose their protection if not made for “disability related expenses,” avoid the debit card. The debit card is a mistake waiting to happen.
THE MOST IMPORTANT USE OF AN ABLE ACCOUNT
An ABLE account can be used to pay for housing.
That may not seem important, but it is.
Supplemental Security Income (SSI) is the source of income for a great number of people who are disabled before age 26 (the age by which someone must be disabled to qualified for an ABLE account.) An SSI recipient over age 18 can have his/her payments be reduced if the recipient receives help paying for housing. That reduction can be up to a third of the SSI payment that the person could otherwise receive.
People who are disabled as children tend to live with Mom and Dad for most or all of their lives. Mom and Dad may be well to do, living in an expensive house. The fair market rent to live in an expensive house can easily exceed one third of the maximum SSI payment, $245. (The maximum SSI payment for 2017 is $735.) For that matter, the fair market rent to live in an expensive house can easily exceed the entire SSI maximum of $735. The SSI recipient doesn’t have enough SSI income to pay fair market rent, so the SSI payment gets reduced.
Mom and Dad (or anyone else, for that matter) can place enough money into an ABLE account (as long as the total deposits during the year don’t exceed $14,000) to allow the child to pay his/her fair share of the monthly cost of the house. Then, the child/ABLE account beneficiary pays money out of the ABLE account to pay Mom and Dad for housing.
(Having the disabled person pay fair share of housing avoids tax issues while payment of “rent” runs into those tax issues. Receiving reimbursement for the fair share of housing doesn’t create income. Receiving rent creates income. That rental income can be offset by the cost of keeping up the house, but it still creates a great deal of tax recordkeeping. Collecting only the fair share of costs doesn’t create an income tax issue as long as documentation of the total cost is checked occasionally and the fair share gets adjusted when someone moves out of the house, such as a sibling moving out for college. Despite the ease of the fair share method, when calculating an SSI reduction, the Social Security Administration uses the fair market value approach.)
There are plenty of other disability-related expense that are eligible to be paid by a Wholly Discretionary. An ABLE account’s ability to pay for housing and remove the possible loss of SSI income is, in my mind, the single best use of an ABLE account.