October 8, 2020
ABLE accounts, named for the Achieving a Better Life Experience Act, have been around since 2014 but remain underutilized across the country despite offering a way for people with disabilities and public benefits to save money without jeopardizing their public benefits eligibility. [1] The reasons why are likely a combination of the limitations that apply to ABLE accounts and a lack of awareness, but for those who qualify and understand how to use them, ABLE accounts can make a world of difference.
Public Benefits
Before delving into the intricacies of ABLE accounts and how they can help your client, you should first understand the problem they were created to solve. Those with means-tested benefits, such as Supplemental Security Income (SSI), Medicaid, housing benefits, or Supplemental Nutrition Assistance Program (SNAP) benefits, must keep their income and resources below a certain threshold (usually around $2,000) or risk losing their benefits. [2] This threshold varies by program and by state, so it is important to understand exactly which benefits a client has. There are many assets which are exempt (not counted), such as a home, vehicle, and household effects; but a personal injury recovery, while not taxable, is countable by nearly every public benefit program (the exception is assistance provided by the Department of Housing and Urban Development (HUD)). If you write a check to your client for their net recovery and they have one of the benefits above, they will have an obligation to report it to the agency which oversees their benefit and will likely lose the benefit until they spend the money or deposit the funds in a special needs trust or an ABLE account. [3]
The list above includes the common means-tested benefits, but this is not an exhaustive list. There are also entitlement benefits which are not means-tested; therefore, they are not affected by income or assets. Social Security Disability (SSDI) and Medicare are the most common, but some forms of Medicaid are not means-tested. Many clients do not fully understand which benefits they have, so the best practice is to get copies of their award letters. Sometimes you can make an educated guess based on the amount they receive—SSI pays a maximum of $783 in 2020, so if the client is receiving $1,200, then they do not have SSI. If they are receiving $700, it could be either SSI or SSDI. The only way to know for sure is to review the award letter.
ABLE Accounts
The Achieving a Better Life Experience Act is a federal law allowing individuals who are disabled to create a tax-advantaged savings account which is exempt from being a countable asset by the major public benefits programs. This allows them to save and invest or spend funds on “qualified disability expenses” (QDE). QDEs are broadly defined to include virtually anything used to support the health and wellness of the account holder.
The Bad News
ABLE accounts are only available to people whose onset of disability occurred prior to turning age 26. The client does not need to have been diagnosed before age 26, but they must be able to certify that their condition presented before that age. This limitation was likely imposed by Congress to limit the number of people who could take advantage of the tax savings. The fact that ABLE accounts have not been utilized as expected, coupled with the many reasons a person can become disabled at any age, has spurred several attempts to raise the age to 46 through the ABLE Age Adjustment Act, but as of the time of this post no changes have been made in that regard.
The other limitation, and the reason ABLE accounts are not the go-to solution for personal injury recoveries, is that only $15,000 can be contributed per calendar year and only one account can be created. An account holder who is working can contribute an additional $12,140 (more in some states) in earnings. This additional amount will grow tax-free but is not sheltered for public benefit purposes. The account balance can continue to grow year after year, up to a maximum set by the state (most are $270,000). If the person has SSI, the account balance must stay under $100,000 or the excess will be counted as income.
The Good News
There are many benefits to having an ABLE account. A big one is the tax advantage. The funds are invested (some offer different portfolio options to choose from) and grow tax-free. Distributions are also tax-free so long as the funds are used on QDEs.
How is this different from a Special Needs Trust?
The exemption from income and asset-counting rules is similar to a special needs trust (SNT) but with two big differences. One difference is that ABLE accounts have fewer restrictions. SNTs are meant to supplement, not replace, public benefit programs. For this reason, SNTs cannot disburse funds for things that are provided by other benefits. For example, if someone has SSI and their SNT disburses funds for food or shelter expenses, the individual’s SSI check will be reduced by up to a third. This is because SSI is meant to provide funds for food and shelter expenses (which includes rent), so the trust would be “replacing” that benefit by expending funds for that purpose. ABLE accounts, because they can be used on qualified disability expenses, can be used for food and shelter expenses. This is an area where SNTs and ABLE accounts can work together. A common workaround is to fund the SNT with the full amount of the net recovery and ask the trustee to disburse funds into the ABLE account each month so the beneficiary can pay for rent, groceries, and utilities. This allows the client to use their settlement recovery for all their needs and protect their benefits.
The other way in which an SNT is different from an ABLE account is that an SNT is a legal document, so it must be drafted by an attorney and distribution decisions will be made by a trustee. An SNT beneficiary cannot compel or have control over the distributions (this lack of control is why the trust is not a countable resource). ABLE accounts, in contrast, are controlled by the client or their representative and require no attorney assistance. All one needs to do is find an ABLE account provider which accepts people in their state.[4] Most have options to sign up online, which can be done in minutes. Further, all decisions about what gets paid are made by the account holder.
The funds can generally be accessed by paper check, electronic transfer, or by using a prepaid card which is linked to the account. The client could even transfer funds to their own personal bank account, but they need to be careful about doing this. If they keep the money into the next calendar month, it will become a countable asset. There are tax consequences for not following the rules, and there could be negative consequences to the client’s benefits (although this has yet to be reported). While there is much to be said for the independence of getting to decide how the money is spent, this should not be offered to clients who are likely to abuse or misunderstand it.
One of the biggest complaints about SNTs is the beneficiary’s lack of control. Since the trustee is charged with making disbursements according to the trust’s terms and the client’s best interest, there is room for disagreement between the trustee and the beneficiary. This can be very frustrating for a beneficiary, having just completed years of litigation, who has strong feelings about what they want and need. If the client is likely to butt heads with the trustee, one strategy is to front-load an ABLE account with $15,000 before funding the SNT. The client can use the SNT for most of their needs but will have the ABLE account to use for things the trustee might deny. Some trustees are open to further funding an ABLE account year after year without asking what the funds will be used for, while others apply the same standards as they would apply to any trust disbursement. This is still a grey area in the trust administration world, so it is up to the trustee to determine what happens to funds in the SNT once the deposit is made.
Instead of using an SNT, could I set up a structure to pay $15,000 per year into an ABLE account?
The answer, unfortunately, is unclear. There are no rules or regulations either allowing or prohibiting ABLE accounts from being funded this way. You could set up a structure to pay to the ABLE account, but the risk would be that either it would be prohibited by a later regulation or that the Social Security Administration or another benefit program would decide to make the contribution a countable resource. These scenarios do not seem likely, but they are possible.
Even if it was explicitly permissible, there are some risks that come with funding this way. One is that the $15,000 threshold could be changed, while the annuity would be virtually set in stone. If the maximum contribution went to $14,000 and a $15,000 check arrived, the ABLE provider would deny it, which would create a headache for the client and the life company. Further, if the client was going to save the money long-term, they would need to make sure they did not reach the maximum threshold. A more likely risk would be that the client might deposit their own money (maybe an unexpected gift, for example). Since the ABLE account cannot accept a penny more than $15,000, if a check that arrived would cause the account to exceed this amount, again, they would deny it.
All of that being said, using a structured settlement to fund an ABLE is still a viable planning option. To have certainty, you would want to fund through a stand-alone or pooled special needs trust. That way the trustee can move $15,000 annually into an ABLE account. It also provides the necessary flexibility in case the maximum contribution goes up or down, the trustee would have the ability to contribute less or more with the balance of the structured settlement payment remaining in the SNT.
What happens to remaining funds when the client dies?
The answer to this question depends on the state. Initially, ABLE accounts were treated like SNTs in this regard: when the client died, Medicaid had a right to be reimbursed for services provided (not including those paid at settlement). A growing number of states have changed this and now disburse funds to the client’s estate. Medicaid Estate Recovery will still apply, but instead of money automatically going to Medicaid, statutory protections can be invoked which prevent estate recovery in certain circumstances.
Conclusion
ABLE accounts are still worthwhile for clients who qualify, and they can certainly be part of a well-rounded settlement plan. It is unfortunate that unless the recovery is very small, ABLE accounts cannot be the entire solution. There are some rules to follow and limitations to be mindful of, but the ability to save beyond the income and asset limits while having control over the money cannot be underestimated.
[1] https://www.cnbc.com/2019/08/24/theres-a-game-changing-way-for-the-disabled-to-save-but-few-use-it.html
[2] Linked here are the rules and exemptions for the major benefit programs: SSI, HUD, and SNAP. For Medicaid exemptions, see your local Medicaid eligibility manual, many of which can be found here.
[3] It is important to note that funds should be used to purchase services or exempt assets so as not to cause ineligibility in a different way. Any purchases need to be at fair market value, which means the money cannot be given away without triggering a transfer penalty.
[4] A list of ABLE account providers can be found here. One to make note of is STABLE, which is based in Ohio, but accepts account holders in every state.
