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A 529 Savings Plan for the Disabled?

Graduation capThis isn’t exactly a 529 plan. However, it’s sort of like one. It’s a new kind of account that’s similar in some ways and is designed especially for those individuals with disabilities.
An NJ101.5 article, “Special accounts for the disabled,” explains that President Obama signed the Achieving a Better Life Experience (ABLE) Act in 2014 as part of the Tax Increase Prevention Act of 2014. The law allows qualified individuals with disabilities to have tax-free savings accounts in which they can save up to $100,000 without jeopardizing eligibility for Supplemental Security Income (SSI) and other means-tested government programs like Medicaid. SSI benefits are suspended for individuals whose accounts are over $100,000, but their Medicaid benefits will continue.
The plan is modeled on 529 college savings plans, and interest earned on savings is free from income tax; however, contributions to the account will not be tax-deductible.
ABLE accounts are different from 529 plans in that the funds in these accounts can pay for education, health care, transportation, housing and some other similar expenses. To qualify, an individual has to have a disability that happened prior to age 26. Also, each individual with disabilities may have only one ABLE account, and the annual contributions are capped at the federal annual gift tax exclusion. That’s $14,000 this year.
Any funds that remain in the account when the account beneficiary dies must first be used to repay Medicaid for expenses incurred on behalf of the beneficiary.
States can offer these types of plans to people with disabilities, but they first must adopt regulations before financial institutions can offer the plans. Right now, Ohio is the only state in the country that currently offers such a plan, but other states’ residents can open an Ohio STABLE account.
The ABLE Act gives those caring for special needs loved ones another tool. However, the establishment of first- and third-party special needs trusts should be considered when contributions exceed the amounts allowed under the Act or when third parties don’t want their assets to be subject to a Medicaid payback.
A qualified elder law attorney can help guide you through your options.
Reference: NJ101.5 (July 1, 2016) “Special accounts for the disabled”

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