When we’re helping families put together an estate plan that includes special needs beneficiaries, we often get questions about ABLE accounts. While ABLE accounts can be a useful tool, we typically don’t use them as an estate planning device. Here’s how they work.
ABLE Basics
Essentially, an ABLE account works as a savings account in the name of a person receiving public benefits. However, unlike a regular savings account, funds in an ABLE account are not a countable resource of the account owner for purposes of MA and SSI.
However, ABLE accounts do have significant limitations. ABLE accounts can only be set up for individuals who are on SSI and have a disability that occurred before age 26. ABLE accounts have low contribution limits (generally no more than $15,000 per year). The account owner must have the ability to manage the funds themselves or have a guardian. And if the account owner dies, the funds must be used to pay back public benefits the owner has received.
There are some small income tax benefits associated with contributions to ABLE accounts. In Wisconsin, the amounts contributed are deductible from on state (but not federal) income tax returns. This means a parent contributing the maximum amount may see a tax savings in the range of $750 per year depending on their tax situation.
ABLE Accounts vs. Special Needs Trusts
Special needs trusts are generally used in two situations: (1) a person receiving public benefits has received a lump sum, such as an inheritance or personal injury settlement, and wants to maintain eligibility for public benefits; or (2) a parent or other person wants to set aside money for a person receiving public benefits as part of their estate plan without affecting the beneficiary’s public benefits.
ABLE accounts generally are not a good fit for either of these situations. Because ABLE accounts can only receive up to $15,000 per year, they will not preserve benefits if the beneficiary receives more than that amount. In addition, when a parent wants to set aside funds for a child receiving public benefits, a special needs trust allows the parent to decide where any unused funds go at the disabled person’s death (i.e. other children). With an ABLE account, unused funds will go back to the state.
However, ABLE accounts can be useful in other situations. Generally, those situations are:
When a person receiving public benefits is working and would like to save some of their earnings without losing public benefits;
Where various family members want to create a pooled fund to use for the beneficiary’s needs;
When a parent or other person is regularly supporting someone receiving public benefits and would like to deduct their support on their state income tax return; or
When the beneficiary receives a small amount (under $15,000) from an inheritance or settlement and would like to maintain eligibility without having to create a special needs trust.
Setting up an Account
As of this writing, Wisconsin has not launched its own ABLE program, but Wisconsin residents may establish an ABLE account in another state. We generally recommend Ohio’s ABLE program due to its low fees and adequate investment options. If the beneficiary wants more investment options, Minnesota’s program may be a better choice.
Have questions about ABLE accounts or special needs trusts? Call our office to schedule or schedule online. We will look forward to meeting with you.