Lahti, Lahti & O'Neill, P.C. Blog

By Michael T. Lahti

Recently I blogged about the new Achieving a Better Life Experience Act (“ABLE” Act).  This is a new law, and we are still exploring how ABLE accounts will be used. Two developments will have an impact on this; the first would be the federal government adopting regulations implementing the new law, and the second would be the states actually creating ABLE accounts. Although regulations will be forthcoming, we do not expect them anytime soon.

It will be interesting to see how this evolves, especially for people who live in states that do not enact an ABLE plan, as the ABLE Act is limited to the state where the person with a disability lives.  But, assuming that the state you live in does enact an ABLE account, we have provided some examples to identify specific issues that may arise.

An ABLE Account is not a Replacement for a Third Party Supplemental Needs Trust as an Estate Planning Technique

Consider the very typical situation where a disabled beneficiary needs to keep his resources under $2,000, and inadvertently comes into some money.  This might happen if a charitably inclined relative leaves a cash bequest to the disabled child.  (This is a classic example of an estate planning mistake with disabled children.   If a child is only allowed to have limited resources, it is essential that anything left to the child be done in a protected way.)  If the amount the child receives is small, then an ABLE account for this beneficiary might be wonderful.  He could simply establish an ABLE account, and transfer the newly inherited cash into it. 

Without an ABLE account, such beneficiary would have had to (1) spend the new resource in the month it was received, or (2) contribute it into a “payback” supplemental needs trust, either a pooled trust or a first party supplemental needs trust, with their associated costs.

Here the ABLE account seems like the “keep it simple” approach here.  However, the child contributing the money into the ABLE account would need to be aware of some potential pitfalls such as the fact that the ABLE account would need to reimburse the state for any Medicaid paid on the child’s behalf after the account were set up and that expenditures from the ABLE account must be spent on “qualified” expenses, or be subject to a tax.

Notwithstanding the above, we urge parents, grandparents and other well-intentioned relatives against simply leaving assets to a disabled beneficiary, thinking that they can simply set up an ABLE account.  There are several reasons why a “third” party supplemental needs trust is the superior strategy in this instance. 

Consider the following:

• An ABLE account has a “payback” requirement to the state; whereas a third party supplemental needs trust (SNT) does not have to be paid back to the state.  With a third party SNT the income and corpus remaining upon the child’s death can benefit surviving family members.
• An ABLE account must be used exclusively for qualified disability expenses or tax with penalties are due; whereas a third party SNT can be used for anything.
• An ABLE account cannot receive more than $14,000 (adjusted for inflation) a year; whereas a third party SNT can receive unlimited amounts.  For example, if you were to leave “1/2 of your estate” to your child thinking she could simply put it into an ABLE account, you would be mistaken.  On the other hand, leaving “1/2 of your estate” to a well-written third party SNT could work perfectly.
• An ABLE account can only grow to a certain size; whereas a third party SNT can be any size.  (Consider the typical situation where a parent will charge their child on SSI rent, which is a valid strategy to maximize SSI.  By charging the child rent her SSI is not reduced up to one-third (1/3) for “shelter.”  The rent payment from the child to parent is often used to purchase insurance on the parent’s life or lives, which in turn benefits the disabled child when the parent dies.  Because the insurance death benefit can be large, it simply makes sense to have a third party SNT as the beneficiary of the insurance to receive the benefits.) 
• An ABLE account will have limited investment choices dictated by the states; whereas a third party supplemental needs trust can invest in anything the person setting it up feels is appropriate.

Careful Thought Must be put Into how the ABLE Account will be Funded

If the beneficiary is able to sign for herself, then she herself can set up the ABLE account. 

But if the beneficiary cannot sign for herself and is left assets (such as an inheritance), then the child would need a court appointed representative to receive the inheritance, (and if such authority did not exist then perhaps permission would need to be obtained from the court in the form of a conservatorship (or guardianship of the estate). 

This can get confusing.  For instance, consider a disabled beneficiary not under conservatorship but whose parent is the “representative payee,” whose bank account from SSI grows above $2,000.  In this instance, a conservatorship would not be needed, as the parent representative payee could simply transfer the overage into an ABLE account for the child.

Unexpected Receipts of Assets

The actual course of action a beneficiary may take with “unexpected receipts of assets” may be dependent on the amount and timing of certain payments that the beneficiary receives.  As a rough guide, larger payments received by beneficiaries would seem to indicate the use of first party (payback) special needs trusts or pooled trusts (which have a payback too); whereas smaller payments would seem to indicate the use of ABLE accounts.  Of course, if the beneficiary is to receive a structured settlement that is less than $14,000 per year, then perhaps an ABLE account would work in place of a full-blown first party supplemental needs trust or pooled trust.  And, perhaps the ABLE account might serve as an adjunct to an existing first party or third party SNT.

Conclusion

There is much still to work out with ABLE accounts, but one thing is certain, and that is that is impossible make general sweeping statements about what will work best for each beneficiary.  It is also clear that care must be taken in each situation to make sure that the right strategy is deployed for each beneficiary.