In the new movie "Finding Dory," the title character has special needs and debilitating "short-term remembery" issues. Through the love, education and understanding of her parents, she has developed skills to help her navigate life differently. As a father of a special needs daughter, I love how this movie accurately portrays the struggles of parents, and I appreciate that the story provides a teachable moment to parents and children who do not face these hardships.
There is nothing more heartbreaking than to find out your child is likely never going to be similar to other children because of a disability or a special need. In addition to addressing the difficulty of meeting their ongoing special needs, there is also the cloud of stress from trying to figure out what the future holds once the parent can no longer be there to provide the necessary safety net.
In the past, parents needed to initiate the complicated and expensive process of setting up a special needs or pooled trust. Now parents can open ABLE accounts, which are tax-advantaged savings accounts for individuals with disabilities. These accounts were created as a result of the Achieving a Better Life Experience Act of 2014. It has taken years for the legislation to translate into actual functioning accounts. ABLE accounts can be part of the solution for how parents can provide for their special "Dorys".
ABLE accounts are built upon the infrastructure of the successful 529 college saving plans. Up to $14,000 annually can be saved and grown through investing to be used for disability related expenses, and the distributions and earnings will be tax-free as long as they are disability related. They also protect the beneficiary from losing eligibility for often used and needed public benefits such as Supplemental Security Income, the Supplemental Nutrition Assistance Program and Medicaid. These public programs are considered safety net programs for those with financial hardships, but, for the first time, eligible individuals will be allowed to establish ABLE accounts that will not impact their eligibility.
Here are a few key elements of these accounts:
Annual funding limits. Qualifying individuals can contribute up to $14,000 per year, and this may be adjusted periodically for inflation.
Number of accounts. Beneficiaries can have only one ABLE account. This is a key difference from college 529 plans. Therefore, friends and relatives will need to pool their contributions into one account with contributions not exceeding the annual limit.
Qualifying disability expenses. A "qualified disability expense" is any cost related to the designated beneficiary as a result of living with a disability. This may include education, housing, transportation, employment training, support services, health care expenses and even administrative services that help improve the health, independence and quality of life of the beneficiary.
State eligibility. ABLE accounts are set up by each state individually like college 529 plans. However, you do not have to set up an account within your home state. Only some states have moved forward with implementation and are accepting account applications and contributions for ABLE accounts. As a result, it may make sense to choose the best state out of the current active plans in order to start funding the account. As more states adopt and implement the accounts, you can always roll the assets from your current account over to a new state plan.
Account size limits. There are limits on how big the account can be without impacting public benefits. Only the first $100,000 of ABLE account assets are exempted from the Supplemental Security Income benefits calculation. Each state limits the total contributions that can be made into ABLE accounts, and there are differences. Many states have set this limit between $200,000 and $300,000, but check your specific state plan. In Tennessee, for example, the state limit is $235,000.
Choosing a state. Look for low internal expenses and ongoing costs, good investment options with minimal fees and commissions and determine what the account minimums are to set up an account.
Rollover opportunity. In addition to funding an account through annual contributions, there is an opportunity to roll over assets from an existing 529 plan into the beneficiary's new ABLE account.
Age limitation. The ABLE Act limits eligibility to individuals with significant disabilities with an age of onset of disability prior to 26 years of age.
These accounts will change the way financial planning is done for disabled individuals by providing a simpler and more cost effective tool to help families deal with their life changing circumstances. ABLE plans will continue to change over time as more states implement them. The ABLE National Resource Center offers an individual state review so you can do direct comparisons between ABLE account providers.
Just like Dory was able to use the resources available to her to learn to cope with and adjust to her unique circumstances, these ABLE accounts are one new tool that you can use to adequately provide for your loved ones so they, too, can just keep swimming.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".
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