When saving for a disabled person’s disability-related expenses, ABLE accounts provide several financial aid and tax advantages over special needs trusts and 529 college savings plans. But, these advantages are offset by an asset forfeiture clause that is triggered upon the death of the beneficiary of an ABLE account.
ABLE accounts and Special Needs Trusts are intended to provide for the care of a disabled family member, especially when the disabled person is likely to survive the death of his or her parents. There are, however, several significant differences between ABLE accounts and Special Needs Trusts.
Differences between ABLE Accounts and Special Needs Trusts
Achieving a Better Life Experience (ABLE) accounts were established by the Tax Increase Prevention Act of 2014 [P.L. 113-295] to allow families to save for the disability-related expenses of a disabled beneficiary without affecting the beneficiary’s eligibility for Supplemental Security Income (SSI) and Medicaid benefits.
However, ABLE accounts and Special Needs Trusts differ in their tax treatment and impact on eligibility for need-based student financial aid.
Earnings accumulate on a tax-deferred basis within an ABLE account and distributions are entirely tax-free if used to pay for qualified disability-related expenses. The earnings in a Special Needs Trust, on the other hand, remain taxable.
Qualified Disability-Related Expenses for ABLE Accounts
Qualified disability-related expenses for an ABLE account include:
- Employment training and support
- Assistive technology
- Personal support services
- Health care expenses, including health prevention and wellness expenses
- Financial management and administrative services
- Legal fees
- Expenses for oversight and monitoring
- Funeral and burial expenses
- Other expenses that maintain the health, independence and qualify of life of the disabled beneficiary
Treatment of ABLE Accounts on Financial Aid Application Forms
Assets in an ABLE account are not reported as assets on the Free Application for Federal Student Aid (FAFSA). Distributions from an ABLE account are likewise not reported as income on the FAFSA.
The law that created ABLE accounts also caused ABLE account assets to be disregarded by any means-tested federal benefit programs, including federal student aid [P.L. 113-295, division B, Title I, section 103]. Assets in an ABLE account beyond $100,000 are considered for SSI (but not Medicaid or other means-tested federal benefit programs) and can lead to a suspension of SSI benefits.
- Notwithstanding any other provision of Federal law that requires consideration of 1 or more financial circumstances of an individual, for the purpose of determining eligibility to receive, or the amount of, any assistance or benefit authorized by such provision to be provided to or for the benefit of such individual, any amount (including earnings thereon) in the ABLE account (within the meaning of section 529A of the Internal Revenue Code of 1986) of such individual, any contributions to the ABLE account of the individual, and any distribution for qualified disability expenses (as defined in subsection (e)(5) of such section) shall be disregarded for such purpose with respect to any period during which such individual maintains, makes contributions to, or receives distributions from such ABLE account except that, in the case of the supplemental security income program under title XVI of the Social Security Act [42 U.S.C. 1381 et seq.] —
- a distribution for housing expenses (within the meaning of such subsection) shall not be so disregarded, and
- in the case of such program, any amount (including such earnings) in such ABLE account shall be considered a resource of the designated beneficiary to the extent that such amount exceeds $100,000.
This is in contrast with a Special Needs Trust, which must be reported as an asset of the beneficiary on the beneficiary’s FAFSA.
But, both ABLE accounts and Special Needs Trusts are not reported as assets on the FAFSA of the beneficiary’s sibling, since they are an asset of the beneficiary and not the beneficiary’s parent.
On the other hand, ABLE accounts and Special Needs Trusts are reported on the CSS Profile of the beneficiary and the beneficiary’s sibling. The CSS Profile, which is used to determine eligibility for financial aid funds from the college, requires sibling assets to be reported if the sibling is under age 19 and not yet in college.
Asset Forfeiture Clause in ABLE Accounts
ABLE accounts have an asset forfeiture clause in 26 USC 529A(f), aptly labeled “Transfer to State.”
If the beneficiary dies, the remaining assets in an ABLE account will be transferred to the state to reimburse the state for the cost of medical assistance paid by the state for the benefit of the beneficiary. The state is eligible for reimbursement only for payments made by the state since the ABLE account was established. The reimbursement to the state is reduced by the amount of any premiums paid from the ABLE account or paid by or on behalf of the beneficiary to a Medicaid Buy-in program. The state is treated as a creditor of the ABLE account and not as a beneficiary. The state must file a claim for payment to receive reimbursement for medical assistance benefits.
Workarounds to Avoid Asset Forfeiture Clause
There are two possible workarounds to the asset forfeiture clause:
- Transfer to new beneficiary. Change the beneficiary of the ABLE account or rollover the ABLE account to another ABLE account. The new beneficiary must be an eligible individual who is a member of the family of the deceased beneficiary. The rollover must occur prior to the death of the original beneficiary.
- Keep funds in 529 plan account and transfer funds to an ABLE account as needed. 529 plans do not have a forfeiture clause, so keeping most of the money in a 529 plan account protects them from forfeiture by the state. A tax-free rollover from the 529 plan account to the ABLE account will allow the 529 plan funds to be used to pay for qualified disability-related expenses. The Tax Cuts and Jobs Act of 2017 allows tax-free transfers from 529 plan accounts to ABLE accounts prior to January 1, 2026. The beneficiary of the ABLE account must be the same as the beneficiary of the 529 plan account or a member of the family of the beneficiary of the 529 plan account. Total annual contributions to an ABLE account, including transfers from a 529 plan account, are limited to the annual gift tax exclusion amount, which is $15,000 in 2019 and adjusted annually for inflation.