Achieving a Better Life Experience (able) Accounts: a New Planning Tool for Persons With Disabilities

• Jurisdiction: United States,Federal
• Author: By Kevin Urbatsch, Esq.* and Jess Farinas, Esq.*
• Publication year: 2018
• Citation: Vol. 24 No. 1

ACHIEVING A BETTER LIFE EXPERIENCE (ABLE) ACCOUNTS: A NEW PLANNING TOOL FOR PERSONS WITH DISABILITIES

By Kevin Urbatsch, Esq.* and Jess Farinas, Esq.*

I. ABLE PROGRAM SUMMARY

ABLE accounts are designed to allow persons with disabilities to control their own money in a tax-free environment without jeopardizing eligibility for public benefits, such as Supplemental Security Income ("SSI") and Medi-Cal. The law authorizing ABLE accounts is based on the law governing 529 Plan accounts, which allow individuals to save money for education expenses, and both provide for tax-free growth and tax-free distributions.

ABLE accounts are a boon for persons with disabilities; for the first time, such persons are allowed to save and control their own money for future expenses without risk of losing public benefits. Estate planners should be aware of these accounts so they can advise families planning for a loved one with disabilities, persons with disabilities, and trustees of a special needs trust ("SNT") regarding the use of ABLE accounts in connection with such trusts to enhance the quality of life of a SNT beneficiary.

Generally, funds in an ABLE account can be used in a number of ways to assist with the support of a person with a disability. For example, ABLE account funds can pay for a beneficiary's food or shelter, so that the account owner's Social Security funds can be used for other purposes. ABLE accounts also can hold modest litigation recoveries or unplanned inheritances, as part of a spend-down strategy. Further, ABLE accounts can receive funds from SNTs or other sources to allow persons with disabilities to manage their own money.

In addition to being exempt from income and asset calculations for purposes of SSI and Medicaid, ABLE accounts allow persons with disabilities to retain eligibility for Section 8 housing, food stamps, and other federal programs that have resource or income limitations.

To properly advise clients regarding ABLE accounts, a practitioner should understand the eligibility requirements and management limitations related to such accounts. These include the following:

• To establish an ABLE account, a person must have been disabled prior to age 26;
• A disabled person can have only one ABLE account;
• An ABLE account can be funded with only one gift each year that qualified for the annual gift tax exclusion ($15,000 for 2018 and indexed annually for inflation);
• An ABLE account can hold up to $100,000 without disqualifying the account beneficiary from SSI benefits;
• An ABLE account can hold up to the state 529 plan limit ($475,000 in California) and not disqualify the beneficiary from Medi-Cal;
• Disbursements must be for "Qualified Disability Expenses" (or risk triggering a penalty); and
• On the death of the person with a disability, any remaining funds in the ABLE account must be paid back to the state Medicaid program for any services paid to or for the benefit of that beneficiary since the opening of the account.

ABLE accounts are managed by each state that has created a program allowing for such accounts. The first ABLE program opened in Ohio. ABLE programs are now open in most states. California's ABLE program is expected to open this year. Californians interested in using an ABLE account can use programs in other states if those states allow out-of-state residents to join (which nearly all do). If a Californian wants to set up an account in another state, the person will be able to transfer that account to the California ABLE program once it is opened.¹

This article will review the history of ABLE accounts, the laws authorizing and interpreting the ABLE program, the eligibility requirements for the ABLE accounts, and how to properly evaluate and compare different ABLE programs.

II. ABLE'S HISTORY

ABLE stands for "Achieving a Better Life Experience." ABLE accounts were a grass-roots attempt by parents of children with disabilities to address the inability of persons with disabilities to save money for their future. The federal government defines "disability" as a physical or mental impairment that will last twelve months or longer and that prevents a person from engaging in substantial gainful activity, which is defined as having the ability to earn no more than $1,170 per month.²

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Without an ABLE account, it is difficult for a person with a disability to secure resources to provide for his or her future. Even if capable of working, people with disabilities have difficulty finding employment:

In 2009, about one-fifth of people with disabilities were in the labor force compared to more than two-thirds of people without a disability. A higher proportion of people with disabilities actively look for employment but are unable to find work compared to those without disabilities. In November 2009, the unemployment rate was 14 percent for those with disabilities and 9 percent for those without. This disparity continues within the labor force: workers with disabilities tend to earn much less than those with no disabilities. In 2007, the median income of households with any working age people with disabilities was $38,400 compared with $61,000 for households without people with disabilities-- a staggering difference of $22,600.³

The only financial support and health care coverage available for many persons with disabilities has been that provided by government programs, like SSI and Medicaid (in California Medi-Cal). In California, the maximum SSI payment in 2018 for an individual with a disability is $910.72 per month.⁴ This amount is designed to pay for all of the recipient's food and shelter costs. As explained below, if another person attempts to assist the recipient with money, food, or shelter, the monthly SSI amount is reduced or eliminated. Further, if assets are saved, SSI, and Medi-Cal benefits are eliminated. ABLE accounts are designed to address this predicament.

A. SSI Resource Test

SSI is the primary way most persons with disabilities pay for food or shelter. To qualify and remain qualified for SSI, an individual recipient must have countable resources below $2,000 ($3,000 for a couple).⁵ These resource numbers have stayed the same since 1989 and are not indexed for inflation.⁶ There has been no indication that these numbers will increase in the foreseeable future. SSI does allow a person to have some exempt assets that are not counted towards the resource limit.⁷ The two most significant exempt assets are a primary residence and an automobile.

If an SSI recipient attempts to save money, he or she loses eligibility for SSI and Medi-Cal coverage. The recipient also may be required to repay benefits paid when assets were over the $2,000 threshold. Without an ABLE account, a recipient who accumulates money must spend it down below the $2,000 threshold, even on things the recipient does not then need. Thus, pre-ABLE, this minimal asset threshold made it impossible for a person with a disability to save for future expenses.

B. SSI Income Test

SSI treats income received by the person with a disability harshly. SSI's monthly benefit is reduced by any "income" received by the recipient. For SSI purposes, income includes gratuitous transfers. In fact, it is broadly defined to include a recipient's earned income, unearned income (e.g., cash gifts), in-kind support and maintenance ("ISM") (e.g., free or reduced cost food or shelter), and deemed income (e.g., income earned by a spouse or parent).⁸ SSI counts all types of income each month (over $20) that a person receives with some type of penalty. Much like the outdated resource limitations, the SSI income disregards are even more hopelessly out of date:

The SSI income disregard amounts have not been updated since President Nixon signed the SSI program into law in 1972. For example, $20 is the general or unearned income disregard whereby a beneficiary can receive a small amount of income from other sources, such as other Social Security benefits or a pension, without having his or her SSI benefits reduced. The cost of living today is more than 5.5 times what it was in 1972, meaning that $20 today is equivalent in purchasing power to about $3.50 in 1972.⁹

Under the SSI income rules, if a family member or friend wants to help a person with a disability by providing a cash stipend or offering free food or shelter, the SSA will reduce or eliminate that person's SSI.¹⁰

C. The Effect of the Public Benefit Eligibility Rules that Prevent Persons with Disabilities from Saving Money

Due to the low resource limits and harsh income penalties of public benefits programs, many persons with disabilities have no way to save money or pay for their own future needs. While an SNT, discussed in more detail below, is one solution, a SNT may not be suitable for modest amounts of support. For example, if a person with disabilities receives $10,000, the costs of establishing and administering an SNT are prohibitive. Moreover, the SNT does not allow a person with disabilities to control and manage the money. This loss of control demeans persons with disabilities who have full use of their faculties.

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D. Special Needs Trusts Remain the Primary Planning Tool but May Not Be Cost Effective in All Situations

The primary planning tool for persons with disabilities remains the SNT, even with the availability of ABLE accounts.¹¹ An SNT allows persons with disabilities to have access to funds in excess of resource and income limitations required to stay eligible for public benefits. Such a trust can provide professional management of investments and distributions that could result in loss of public benefits. An SNT makes sense for persons with disabilities who do not have capacity to manage their own financial affairs, and replaces the need to establish a guardianship or conservatorship of the estate.

The cost of establishing and administering the SNT is a drawback. This cost may include attorney's fees for establishing the trust, trustee and more attorney's fees for administering...