People with special needs often find themselves in a difficult situation: while they may work, and their family may provide them supplementary income, they risk losing much-needed government assistance if their income exceeds a certain level. This balancing act can make it difficult for people with special needs to attain any type of financial security. However, California lawmakers recognized this problem in 2014, when it passed the Achieving a Better Life Experience (ABLE) Act, designed to let people with special needs open savings accounts without jeopardizing their eligibility for state- and federal-level benefits.
All About the ABLE Act
The ABLE Act is a relatively new addition to California’s special needs landscape. The ABLE Act, passed in 2014, was meant to provide Californians with special needs a way to save money for care, maintenance, and everyday expenses without risking their state and federal benefits.
An ABLE account can be used to pay for qualified disability expenses, including:
- Employment training
- Financial management services
- Legal representation
What ABLE Accounts Offer
An ABLE account lets a person with special needs open a tax-free savings account without risk to their government benefits, provided they meet certain criteria:
- They must be at least 26 years of age.
- They must satisfy the Social Security Administration’s criteria for “significant” cognitive, physical, or other physical limitations stemming from their disability.
The funds in ABLE accounts cannot be taxed, and they cannot be considered in benefits applications. However, ABLE accounts have limitations: they cannot be used to help anyone under the age of 26, even if they are living independently. And, like other types of state-sponsored savings or investment accounts, they have annual contribution limits. For ABLE accounts, the limit is $14,000 per year.
ABLE Accounts and Special Needs Trusts
For many people, opening an ABLE account presents a convenient way to ensure a loved one can live independently, even if they are unable to work or receive reliable income.
However, ABLE accounts have capped annual contributions and do not allow beneficiaries to have more than $100,000 in savings. If an ABLE account holder exceeds $100,000 in savings, they may be automatically barred from receiving critical benefits. Any amount over this limit counts toward an individual’s $2,000 Social Security Insurance “resources cap” and may cause a temporary suspension in the receipt of benefits.
The limitations on ABLE accounts can present families with a big dilemma if:
- The account-holder is under 26 years of age and requires substantial funds to live independently or healthily.
- The account-holder needs intensive or long-term care that will cost more than $15,000 per year.
- The account-holder’s main guardian wants to leave a large inheritance that will take care of their loved one’s needs for life.
People who have needs beyond what an ABLE account can offer may want to consider establishing a special needs trust. While special needs trusts cannot be managed by the disabled person—they must be administered by a trustee—they provide similar tax advantages and can be used to save larger amounts of money for short- or long-term care.
Often, a special needs trust can be coupled with an ABLE account. This strategy ensures that a person with special needs has access to their own independent account, while keeping a reserve for their long-term care.
An estate planning attorney can help you decide whether you need an ABLE account, a special needs trust, or both.
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