ABLE Plans – A Supplement To Special Needs Trusts

October 14, 2016

Robert Katz, CFP®


What are 529A Plans?

In 2014, the Achieving a Better Life Experience (ABLE) Act was passed allowing for the creation of special tax-advantaged accounts for those with special needs. It is only now that these accounts, also called 529A Plans or ABLE accounts, are becoming available. Administered at the state level, these accounts closely resemble 529 College Education Savings Plans with several important differences.

How do 529A Plans work and who qualifies?

The new 529A Plans are funded with after-tax dollars and those contributions can be invested within the constraints of the investment options made available by each state’s respective plan. All growth and earnings in the account are tax-exempt as long as distributions are made for “qualified disability expenses”, which are broadly defined.

In order to establish a 529A Plan, the beneficiary must be someone who is blind or diagnosed with a disability causing severe limitations before the age of 26. Recipients of SSI (Supplemental Security Income) or SSDI (Social Security Disability Insurance) are eligible for 529A Plans as long as the disability began before age 26.

What are the benefits of these plans?

While these plans will never eliminate the need for, or primary benefits of, traditional Special Needs Trusts (SNT), there are certain features of the plans that make them appealing as a potential alternative for smaller asset levels or as a supplement to SNTs:

  • Up to $100k is excludable for purposes of qualifying for SSI or Medicaid (typically must have less than $2k in assets to qualify for these programs)
  • Growth and earnings are tax-exempt as long as distributions are made for “qualified disability expenses”
  • Simple to establish/administer and not subject to the typical expenses of SNTs (legal fees, administrative expenses, and unfavorable tax treatment)

What factors must be considered before establishing a 529A Plan?

There are certain complexities to these plans that need to be considered:

Asset control – the original transferor can maintain control of the property in the limited partnership by retaining a very small GP interest.

  • Contributions must be made in cash
  • Only one account is allowed per person though multiple people can contribute
  • The total maximum annual contribution from all donors is $14k – this contribution limit may be adjusted periodically to account for inflation
  • Assets in these accounts at the beneficiary’s passing are subject to the Medicaid Pay-Back provision
  • Investment choices in the plan are typically limited and allocation changes are permitted twice a year
  • No additional contributions are permitted once the plan balance exceeds the state-based maximum funding amount (varies by state; typically ~$300k-$400k)
  • Nonqualified distributions are not eligible for tax-free treatment – pro-rata distribution of principal and gains with gains subject to ordinary income treatment and a 10% penalty
  • Currently, there are only four states (Florida, Nebraska, Ohio, and Tennessee) with established 529A Plans while more are expected to roll-out their own plans in the coming year. Florida ABLE accounts are only available to state residents, while the other three programs accept enrollment nationwide.
  • Note-contributions made by residents of Nebraska and Ohio may be eligible for state income tax deductions.

Interested in learning more?

Please feel free to contact Robert and/or Seth in our Wealth Strategies group if we can be of any assistance when deciding whether this strategy makes sense for you, or any of your clients.

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