ABLE accounts, similar to special needs trusts and pooled trusts, allow qualifying persons with disabilities, including personal injury victims, to save money without jeopardizing their eligibility for means-tested public benefits.  Means-tested public benefit programs generally impose income and resource limitations.

For example, to qualify and remain eligible for Social Security Income (SSI) and Medicaid, countable assets cannot exceed $2,000 for an individual or $3,000 for a couple with no index for inflation. ABLE accounts, special needs trusts and pooled trust provide important exceptions.

Assets in an ABLE account and distributions from the account for qualifying expenses are disregarded when determining the beneficiary’s eligibility for almost all federal means-tested benefits.

For tax purposes, an ABLE account is treated similar to a 529 college savings plan. Income generated by an ABLE account is not taxed; nor are distributions so long as they represent Qualified Disability Expenses (QDEs).  The ABLE Act identifies a range of QDEs which are approved by the Secretary under regulations and consistent with the purposes of this section:

Qualified Disability Expenses

ABLE accounts also represent an important potential growth opportunity for structured settlement annuities.

Although no definitive legislative or regulatory authority currently exists either permitting or not permitting structured settlement annuities to directly fund ABLE accounts, structured settlement annuities can be used to indirectly fund ABLE accounts thru special needs trusts or pooled trusts.

For more detailed discussion about direct funding of ABLE accounts with structured settlement annuities, see this related article in the Independent Life Chronicle.

The individual with a disability is the owner of the ABLE account and may manage the account independently. If the individual cannot, or would prefer to have assistance, an individual legally authorized to act on his or her behalf (such as a parent, legal guardian, or person acting under the power of attorney) may open and manage an account.

Although states sponsor ABLE accounts, the financial management of the funds is left to private financial institutions, such as Fidelity, Vanguard, BlackRock, Schwab, and others. When individuals open an ABLE account, they choose an investment strategy from those offered by the state ABLE program.

An ABLE account may be used as a complement or alternative to a fully-functioning Special Needs Trust. Special Needs Trusts (SNTs) and ABLE accounts have important similarities and even more important differences.

Both SNTs and ABLE accounts preserve eligibility for SSI and Medicaid and Medicaid payback rules apply to both – although the payback rules are more favorable for ABLE accounts. The primary advantages of SNTs are: 1) no minimum age requirement; 2) no contribution limitations; and 3) for structured settlements, no uncertainty about the ability to make direct payments.

The advantages of ABLE accounts vs. SNTs are many:

  • Ease of setup
  • Limited reporting
  • No age 65 limitation
  • Limited setup cost and administrative expense
  • Lenient rules for certifying “disability”
  • No SSA review requirement
  • Direct access to funds
  • Sole benefit rule” not applicable
  • More favorable Medicaid payback rules

For additional information, see this Knowledge Network article about the ABLE Act.