Taking a Look Forward

Occidentally, the government gets something right. However, to what is is yet to be seen. With that being said, on December 22, 2014, it was reported that President Obama signed the ABLE Act into law. ABLE is an acronym for Achieving a Better Life Experience and the law will allow families who provide care for any family member who was declared disabled before the age of twenty-six to capture tax preferred growth for the care and comfort of their loved one. The act in part mirrors the 529 college savings account with a few additional perks. Whereas the 529 account can only be used for the financial requirements of college, the new ABLE account will cover a host of other care and comfort activities.

Similar to the 529 accounts, interest earnings on the ABLE accounts will be tax-free, and where I come from, tax-free is a good concept. However, unlike the 529 accounts, which can only be used for education related expenses, the funds accumulated in the ABLE accounts can be used to pay for education, health care, transportation, housing and other expenses associated with the beneficiary's disabilities. Of course these allowances will be further determined by the Treasury Department sometime this year. However, this gives the average family caring for a disabled child or adult an alternative to the special needs trust. There is one more caveat that will limit the application of the ABLE Act. The family member with the disability (the beneficiary) must have been deemed disabled prior to his or her twenty-sixth birthday. Therefore, the accounts will be limited in their scope to help those who might become disabled due to continuing military engagements around the world.

Another concern I have about these accounts is that the federal government has left the regulations up to the states. Each state has six months to write the regulations governing the accounts. Although there is some level of consistency between states, one has to wonder if there will be complications if the services are provided by out of state organizations. Some might be concerned how having an ABLE account would affect federal and state benefits. However, ABLE accounts will allow families to save larger amounts of money without affecting their eligibility for SSI, Medicaid and other public benefits.

The amount of money that can be contributed to an ABLE account is the same as the federal gift tax exclusion, which is currently $ 14,000 annually. Many states have set their 529 account restrictions for education related expenses at $ 300,000. It appears that the first $ 100,000 deposited into an ABLE account would not affect the $ 2,000 restrictions relating to impact to eligibility for SSI, Medicaid and other public benefits. This is a good start, but each state will set limitations and regulations so we will not know the full extent of the law until the state by state regulations are established.

As one can imagine, no accounts can be established before the regulations have been written. Since the ABLE Act is going to amend Section 529 of the Internal Revenue Service Code of 1986, caregivers can assume that the process for establishing the accounts will reflect each state's current 529 accounts. For example, the State of Maryland (the state where I live) has two types of 529 accounts. The Maryland Prepaid College Trust and the Maryland College Investment Plan. The former is backed by a Maryland Legislative Guarantee and the latter managed and underwritten by T Rowe Price. Based on this, the state of Maryland is likely to establish the ABLE Accounts in the same fashion.

As a caregiver life coach who provides financial stability coaching, I would suggest that choosing an account option that is managed and underwritten by a financial company is the preferred choice. Without you trust the state legislature, choosing the account that is backed with a legislative guarantee introduces a higher level of risk. To learn more about where your state ranks in fiscal discipline, Google "red-state-black-state PDF" and follow the link. Without your state is operating at 8, I would always lean towards the managed and underwritten by type account.

Finally, I want to discuss the advantages of the ABLE account over the special needs trust. On the up side of the ABLE accounts, there is the uncomplicated tax effect. Irrevocable trusts are still subject to taxation as my wife and I found out in 2012. Although the tax nightmare created by our son's irrevocable special needs trust is an aging struggle, the ABLE Act accounts will mitigate the stress of taxation by being a pre-tax , tax-free growth account. In this way, the ABLE Act account will remain the Roth IRA since the assets are used for the care and comfort of the beneficiary.

It has yet to be seen if those currently holding a special needs trust will be allowed to transfer the assets from the trust into an ABLE account. I will be writing our state legislation to encourage this particular action. In the meantime, I would encourage every caregiver to follow the progress of this promising legislation through their specific State House. Hopefully, these accounts will be available by the third quarter of this year.

There is one last concern for the caregiver that I would like to address. Once the account is established with a financial company, the caregiver will have the opportunity to influence the direction of the investments. This is an important component of the account. If you have worked hard to set aside money for the care and comfort of a loved one, that money should be working for the same purpose. As with every type of account I manage for my family, I will be analyzing the best mix for the greatest gain while looking to reduce the risk of achieving that gain. Therefore, I hope to produce a series of articles on each state's plans, but I will need your input. Once the accounts are established, I will be seeking to collect the details and publish an analysis of each state's managed and underwritten plan.