Taxpayers caring for disabled children can look forward to a new savings vehicle that will help them cover certain expenses: The 529 ABLE account. But could it replace the tried-and-true special-needs
trust?
This new savings account was brought into existence after President Barack Obama signed it into law on Dec. 19, 2014, along with the tax extenders package for that year. The legislation is called the Achieving a Better Life Experience Act, and it
expands the tax code under Section 529 to create tax-advantaged accounts for disabled individuals.
As contributions go, individuals can contribute up to $14,000 — the current annual gift exclusion amount — in a given taxable year into one of these ABLE accounts.
Account holders can take distributions, provided they are for the beneficiary's qualified disability expenses. That amount
will not be included in gross income. In order to be eligible for an ABLE account, the beneficiary must be someone who had a disability that occurred before he or she turned 26.
One of the biggest benefits of the ABLE account is that the money held there is exempt from the $2,000 limit on
personal assets for individuals who wish to qualify for public benefits. Generally, a disabled person with more than that amount is ineligible for Medicaid and Supplemental Security Income benefits.
Though the accounts are now allowed, they're not here yet. “The government has authorized the creation of ABLE accounts, but you can't open one today,” said Tim Steffen, director of
financial planning at Robert W.
Baird & Co. “The individual states will have to come up with their plans and they'll have to market them to individuals in their states.” He predicted it would be at least a year before these 529 ABLE vehicles become a reality.
Nonetheless, it's worth doing a side-by-side comparison of the 529 ABLE and the special-needs trust, an
irrevocable trust accountants have turned to in order to help parents provide for their disabled children — while preserving eligibility for public assistance.
TWO DIFFERENT VEHICLES
Though the intent of 529 ABLE accounts is the same as special-needs trusts — allowing disabled beneficiaries to qualify for Medicaid and SSI income benefits — how they'll accomplish that will be different.
Let's start with the limits applying to contributions and the size of the account. Special needs trusts can hold an unlimited amount of assets, but only the first $100,000 in the ABLE account will not be subject to the $2,000 personal asset limit that determines eligibility for receipt of SSI benefits.
Further, special-needs trust assets can be used to cover nonmedical things Medicaid otherwise wouldn't cover. These are called “supplemental” expenses.
“You're allowed to have assets for things like haircuts, grooming, personal items that Medicaid doesn't pay for,” said Theodore J. Sarenski, a CPA and personal financial specialist with Blue Ocean Strategic Capital. Meanwhile, there are limits on the types of expenses an ABLE account can cover: education, housing, health care, prevention and wellness, and funeral expenses.
Beneficiaries who die with money in the 529 ABLE account will have to repay the public benefits they had received after opening the account.
Perhaps the most glaring difference between the 529 ABLE account and the special-needs trust comes down to the tax and cost implications of each.
TAX LANDSCAPE
Don't forget that trusts are subject to steep taxes for income that isn't distributed. Money that's going out of a special-needs trust is taxable to the beneficiary receiving it. Properly structured, income generated within the special needs trust won't be taxed at the top rate of 39.6%.
Meanwhile, money coming out of a 529 ABLE account is tax free if it's going toward a qualified disability expense. With Mr. Obama backing away from taxing 529 accounts altogether, at least we can be reassured that beneficiaries of 529 ABLE accounts won't have even more to worry about.
“The benefit [of the 529 ABLE] is that you avoid taxation, especially now that the president has dropped the idea of taxing the 529,” Mr. Sarenski said. “In the near future, you won't have to worry about taxation on 529s. But it's a tax law, and as we know, tax laws can change.”
TWO KINDS OF CONSUMERS
Tax experts envision two different kinds of consumers going for the special-needs trust and the 529 ABLE account.
“People who don't have the assets for a special-needs trust, middle-class taxpayers” might prefer the ABLE, said Mr. Steffen. Special-needs trusts require an attorney to draft the document, plus a trustee to manage the assets, so it'll make better sense for those clients who have that kind of money. Further, the ABLE account will likely have money going into it and coming out on a regular basis, while the special-needs trust is more of a vehicle for long-term assets.
Wealthier individuals, meanwhile, will find the tax-free benefits of the ABLE account to be even more beneficial. It's another way to provide for a disabled child's educational and housing needs while still locking in the benefits of Medicaid. Clients may even look into using a special-needs trust and a 529 ABLE account, the former for larger assets and supplemental expenses and the latter for near-term needs.
“These accounts solve different needs and different purposes,” Mr. Steffen said. “I don't see why they can't work together.”
