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Over the years, the primary estate planning tool for parents with a special needs child was an Amenities Trust. This trust allows parents to provide an inheritance to their child without impacting their child’s eligibility for certain government benefits.
During the Obama administration, the federal government added another tool for parents with a special needs child called the Achieve A Better Life Experience (“ABLE”) Act. An ABLE account is a tax-advantaged account (much like a 529 college savings plan) that helps parents and children save funds for qualified disability expenses.
The benefits of an ABLE account are: 1) it is cost-effective to establish; 2) it allows small minimum contributions that are tax deductible on a Michigan income tax return; 3) it allows more financial independence for a child who is capable of handling independence; 4) it can be commingled with funds from both the parents’ and the child; 5) it allows contributions to grow tax-free; and 6) it allows a child to save without losing government benefits.
The limitations of an ABLE account are: 1) it can only be used for “qualified disability expenses”; 2) annual contributions are capped at $15,000 per year for 2019 and 2020; 3) the child must be disabled before the age of 26; 4) state payback requirement – funds remaining in the account after the child’s death will first be paid back to the State of Michigan for Medicaid expenses; and 5) there is a risk of a child making unauthorized expenses without understanding the consequences of doing so.
While ABLE accounts are beneficial in some circumstances, ABLE accounts will likely not replace a special needs trust primarily because special needs trusts don’t have a state payback requirement like an ABLE account.
If you’re interested in learning more about estate planning and the entire range of special needs planning options that are available and what options are best for your situation, please call Marty Bodnar at 734-665-4441 or email him at firstname.lastname@example.org.
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