DECEMBER 29, 2014 VOLUME 21 NUMBER 47
Last week we told you about the passage of The Achieving a Better Life Experience Act, and tried to spell out some of the important details. But until we can all see actual cases, it might be hard to figure out how to use the new law (and the accounts that it authorizes). This week we’re going to suggest some of the ways that the new ABLE accounts might be useful — and some of the pitfalls for people who use them unwisely.
First, a caveat: we don’t really know what the ABLE accounts will look like yet. That’s because we’re collectively waiting for two things: the federal government needs to adopt regulations implementing the new law, and states need to create ABLE accounts. Neither will be complete for months, at least.
What will the ABLE landscape look like in six or nine months? We predict that there will be federal regulations, and that a number of states will have created ABLE accounts that resemble (in each instance) their existing 529 accounts. But probably not all states will have gotten on board by then. If you (or the family member you want to create an ABLE account to benefit) happens to live in a state that is lagging in implementation, the new accounts will simply be unavailable. Though you might be able to choose among the Section 529 plans of several dozen states when making a contribution, the ABLE Act limits you to the state where the person with a disability lives.
Let’s assume, though, that there is an ABLE account available. Who might set up accounts, and why would they choose an ABLE account over the other alternatives available? Let’s try some examples.
We’ll start with Guillermo. He is 30 years old, and he was born with Cerebral Palsy. He lives with his parents, who provide for most of his daily needs. His grandmother has just died, leaving him a small inheritance of $10,000. She did not create a special needs trust for him; she simply left him the $10,000 in his name directly.
Guillermo was disabled at birth, so he will have no trouble meeting the ABLE Act requirement that his disability had to begin before age 26. Guillermo has the mental capacity to sign a receipt for his inheritance, to open an account in his own name and to sign checks on that account — though his disability makes it impossible for him to actually sign the checks. His Supplemental Security Income (SSI) payments go into an account in joint tenancy with his mother, who makes the actual payments from the account. The bank account now has about $1500 accumulated; it is a regular problem for Guillermo and his mother to figure out ways to spend the money to keep him from losing his SSI — and the Medicaid benefits that flow from it.
Guillermo is the classic ABLE Act candidate. He could put all of his inheritance into an ABLE account, and the savings would not cause him to lose his SSI or Medicaid. He would have control over how the money was spent; he would not have to get approval from a trustee or anyone else before deciding to make a purchase. Of course, he will want to make sure his expenditures do not violate the final regulations limiting the distributions from the ABLE account, but that will probably not be any problem. In fact, Guillermo can contribute future funds to the account, too — as his SSI checking account builds up, he can put funds into his ABLE account to stay below his $2,000 limit. In this way, Guillermo can set aside savings for future expenditures — such as when he is no longer able to live with his parents.
Would Guillermo have other choices? Yes, he would. He could establish a self-settled special needs trust, or participate in a pooled special needs trust. Either of those would likely have more start-up costs than his ABLE account, and the fees charged by either a separate trustee or a pooled trustee would likely exceed the annual administrative costs in the ABLE account. Most importantly, perhaps, the ABLE account would permit Guillermo to directly control his money, which is a terrific advantage.
Knowing what a good idea the ABLE account looks like for Guillermo, should his grandmother have just set up an ABLE account before her death? Absolutely not. Why not? Because of the ABLE account’s payback requirement.
Looking at the same transaction from Guillermo’s grandmother’s perspective, it looks completely different. It would be simplicity itself for her to modify her will to provide that the $10,000 bequest to Guillermo should be held in a third-party special needs trust — probably naming his parents as trustees, and his sister as successor trustee. The cost? Perhaps an additional few hundred dollars over the cost of her basic will. The advantages? Complete discretion in how to handle Guillermo’s money (admittedly it would be handled by his parents, but there’s nothing that prohibits them from letting Guillermo make many of the decisions for them), no administrative costs, and no payback requirement.
Meanwhile, Guillermo’s grandfather (from the other side of the family) is planning on leaving a larger bequest to Guillermo — he is going to leave Guillermo a full 1/4 of his estate. Could he utilize the ABLE account? Absolutely not. Why not? Because his gift will be more than the $14,000/year that could be contributed to all ABLE accounts for Guillermo’s benefit, and so ABLE is simply not a choice. He could, of course, make annual contributions of $14,000 until he has put 1/4 of his total estate into the account, but that’s not what he wants to do — and besides, he is in his 80s and might not live long enough to transfer Guillermo’s full inheritance into the account.
Guillermo’s family is not wealthy, but his mother thinks she could afford to put as much as $10,000 per year aside for Guillermo’s future needs. Should she utilize an ABLE account? Almost certainly not.
What’s wrong with ABLE accounts for Guillermo’s mother? The payback issue is a real problem, and one that’s easily avoidable by her setting up a third-party special needs trust. Yes, that does mean that she will need to pay the cost of creating a trust, but there will not be any continuing cost for administering the trust. She can consult with an attorney, create a trust, and start contributing funds to the trust right away. She can expressly permit expenditures that the ABLE accounts might preclude. She can invest the trust’s money in any way that seems appropriate to her — not just Guillermo’s state’s ABLE provider. She can look for lower-cost and higher-yield investments if she chooses.
Would the answer be different if Guillermo’s mother only intends to contribute $2,000 per year? Not really. She ought to start with the very small investment of talking with an experienced attorney to figure out whether she really wants to create either a trust or an ABLE account; there might be even smarter, more cost-effective options (like just creating a separate account in her own name and earmarking it for Guillermo’s benefit).
Wendy is very much in the same situation as Guillermo, with one important difference: her disability is Down Syndrome, and her ability to make her own decisions is very limited. Her parents have been appointed as guardian (of her person); otherwise, her situation is similar to Guillermo’s. In fact, Wendy’s grandmother has just died, leaving $10,000 in her name. Is her situation the same as Guillermo’s?
Not quite. The cost of an ABLE account will actually be higher for Wendy, since she can not sign a receipt for her grandmother’s estate, or negotiate the check she receives. Her parents will probably need to go back to court to get appointed as her conservator (what is called guardian of the estate in some states) in order to set up the ABLE account. Depending on her local court, they may have to file annual accountings for the ABLE account even after it is set up.
For Wendy, a pooled special needs trust might be more suitable. Yes, there will be a small start-up cost, and there will be a payback requirement at her death. But the administrative expenses are likely to be lower than the cost of a continuing court proceeding. The best answer for Wendy might vary from state to state, from county to county, and even from year to year.
What if Wendy’s SSI bank account builds up to more than the $2,000 she’s permitted to keep? The excess might very well be directed to an ABLE account. The reason the answer is different: her mother, as representative payee, has the authority to set up the account, and the administrative costs are therefore lower than they would be for a pooled special needs trust.
Unfortunately, Wendy was a passenger in a van that was hit by a negligent driver. The good news: Wendy’s injuries were slight, she has recovered completely, and the negligent driver was insured. His insurance company has offered $5,000 to settle her claim.
Can this money be put in an ABLE account? Yes, and that might be the best choice. Like the small inheritance from her grandmother, there will be some administrative costs (getting the court to approve the settlement and allow the ABLE account), but the ABLE account might be the best alternative. That will especially be true if her grandmother’s inheritance was already put into an ABLE account AND the accident settlement is in the next year.
Tragically, Guillermo was also injured in an auto/van accident the year after he received his inheritance from his grandmother. His injuries were more serious: the insurance company is offering $60,000 to settle his claim. Can he use his ABLE account?
If you’re paying attention, you probably think the answer is “no.” But it’s not. There is a two-step way Guillermo can use his ABLE account to receive the lawsuit settlement.
First, he could agree with the driver’s insurance company to make not a single $60,000 lump-sum payment but annual payments of $9,000 for seven years. That means that he would actually get a few more dollars in total settlement. Each year’s $9,000 can be contributed to the ABLE account without running afoul of the $14,000 annual limitation (which will rise to $15,000 within a couple years of Guillermo’s accident, making it even easier).
Of course, Guillermo still will have a payback requirement upon his death. But the language of the ABLE payback is considerably gentler than the payback requirements for special needs trusts — the ABLE account should be available to pay Guillermo’s funeral and burial expenses, for instance, without requiring that he prepay those bills.
Guillermo was not alone in the van. His sister Louise was also in the van, and she was horribly injured. She was disabled by the accident; her work history is such that she receives about $500/month from Social Security Disability and another $300/month from SSI. Because she gets SSI, she also gets Medicaid coverage. She was 28 at the time of the accident.
Can Louise’s potential settlement be directed to an ABLE account, in the same way that her brother’s was? Absolutely not. Why not? Because her disability onset was after age 26. That arbitrary (and unfair) limitation, incidentally, is not based on anything but budget considerations; if Louise and people like her had access to ABLE accounts, the anticipated cost to the treasury would mushroom and Congress could not figure out how to pay for it.
Your Situation Here
As you can see, it might be hard to figure out whether an ABLE account is the right way to resolve a particular person’s problem. Some generalizations, though: if you are considering setting aside your money for a family member with a disability, ABLE is probably not your best choice. If the problem is how to handle money belonging to the person with a disability, there are quite a few factors to consider. You should get good legal advice to figure out the best solution in your situation.