Having a child changed my whole world, in ways massive and small – most of which are beyond the scope of this blog. One of the most profound changes I experienced can be summed up in one, innocuous-sounding word: worry. The sheer number of options for a parent to worry about is astonishing.
One of the things I worry about is her future. I would like her to have the opportunity to attend college, but I worry about sending her off into the world with massive amounts of debt. Consequently, I put a fair amount of time and money into giving her an unencumbered start so that she can have the best chance to thrive, financially and otherwise.
When saving for college isn’t enough
I’m sure there are quite a few parents out there who can relate. Planning for our children’s future while taking care of their needs today is a balancing act that many of us are all too familiar with. But for a few close friends of mine, there is an extra layer of concern.
Parents of children with disabilities often find themselves in an untenable position. In many cases, the cost of care for a child with a disability places tremendous financial pressure on the entire family. While it’s true that government programs can – and do – pay a significant portion of these costs, often the family is still on the hook for a daunting amount. Even if parents are able to scrape together funds to save for college for their children without disabilities, there is little that can be done to save for children with disabilities that doesn’t disqualify the child from the federal programs necessary to pay for his or her care.
A solution…sort of
Until recently, the answer to this dilemma was a special needs trust, which is an irrevocable trust set up to provide for the needs of a disabled individual without impacting eligibility for public assistance. But creating a trust is an involved process involving an accountant, attorney and usually, a great deal of money. Furthermore, assets in a trust can be subject to significant tax liability, and any distributions are taxable to the recipient.
A better solution
Enter the 529 ABLE account, created late last year. (ABLE stands for Achieving a Better Life Experience.) ABLE accounts will allow up to $14,000 per year in contributions (the current gift tax exclusion), tax-free growth, and qualified distributions that are excluded from gross income for the beneficiary. Funds up to $100,000 held in an ABLE account will be exempt from the $2,000 limit that determines eligibility for Medicaid and SSI.
ABLE accounts will not have quite as much latitude as special needs trusts when it comes to qualified distributions, but the definition is still fairly broad. Distributions can be used to cover, among other things, education, housing, health care, employment training and management, financial management, and funeral expenses. Additionally, any funds left in an ABLE account after the death of the beneficiary will be used first to repay any Medicaid or SSI benefits received by the beneficiary after the account was opened.
There are also notable differences between ABLE accounts and Section 529 plans. While account size limits will be the limit already set by the states for 529 plans, the contribution limit for a given year will be equal to the gift tax exclusion for that year. The accelerated gifting provision for 529 plans will not apply to ABLE accounts.
Other differences apply to beneficiary designation. The account owner and beneficiary for an ABLE account must be the same person, and assets placed in the account are deemed an irrevocable gift to the beneficiary. Also, while there is no limit on the number of 529 plans that can be opened for a single beneficiary, ABLE accounts are restricted to one account in one state for each individual.
Next steps for ABLE accounts
While the legislation that created ABLE accounts is federal, the accounts will not be available until the states set them up. There is no clear timeline for this process.
Additionally, there are many areas in the legislation creating ABLE accounts that will require some guidance and clarification as the plans are implemented. But ABLE accounts are a big step in allowing the families of individuals with disabilities to put aside money to help give them a brighter future.