What is an Able Account and How Does it Affect Californians?
An Able account is a tax-advantaged savings account designed to help Americans with disabilities. Before Able accounts, persons with disabilities risked losing federal and state benefits if their assets or income were above a specified low threshold. This limited the disability community from building savings accounts and financial security.
This was a source of constant fear. It often took complicated and time-consuming strategies to earn or save money and stay compliant with their benefit programs like Medicaid, Social Security Disability Insurance (SSDI), or Supplemental Security Income (SSI).
Now, qualified persons with disabilities can have an account where they can contribute and grow their savings without the constant concern of losing their federal or state benefits. And the investment earning are tax-free when withdrawn if used to pay for disability-related expenses.
But there are rules and conditions on these accounts. This article explores how California estate planning attorneys are helping clients with disabilities establish and use a tax-advantaged Able account to save money and increase their independence.
ABLE Accounts: the Laws
In 2014, the Stephen Beck Jr. Achieving a Better Life Experience Act was signed into federal law. The ABLE Act allows Americans with disabilities to open an ABLE Account without the risk of losing their eligibility for public benefit programs.
California passed the California ABLE Act in 2015, allowing qualified Californians with disabilities to open a tax-advantaged ABLE account in any state with a national plan. In 2018 California launched the California ABLE Act, called the CalABLE program, and began accepting enrollees.
In California, the State Treasurer's Office oversees the California ABLE Act board, which regulates ABLE accounts.
As of December 31, 2022, Californians with disabilities opened 9,000 CalABLE accounts with about $90 million in assets and began saving for their financial futures.
Who is Eligible for an ABLE Account?
A CalABLE account may be opened by an eligible person with a disability or by someone on their behalf.
To be eligible, a person must:
- Be eligible for SSDI or SSI because of blindness or a disability as determined the Social Security; or
- Have a disability certificate. This must be a diagnosis signed by a licensed physician.
An eligible individual is someone who:
- Is entitled to SSI or SSDI because of a disability or has blindness as determined by the Social Security Act; or
- Has a disability certification (a signed diagnosis by a licensed physician).
And the disability or blindness must have happened before their 26th birthday.
However, in 2022, Congress passed the ABLE Age Adjustment Act, which increases the onset threshold from age 26 to age 46. But this does not take effect until 2026. For now, only those with a qualifying disability that happened before age 26 can open a CalABLE account.
Is an ABLE Account Tax-Free?
An ABLE account is similar to a 529 college savings account. In fact, they are designated by the IRS as 529A ABLE accounts.
It allows individuals with disabilities and their families to save money for qualified disability expenses without affecting eligibility for government benefits.
The funds in a CalABLE account grow tax-free from California or federal taxes. And they can be withdrawn tax-free if they are used for qualifying disability expenses for the beneficiary of the account.
What are Disability-Related Expenses?
While CalABLE accounts are to be used for disability-related expenses, the definition of these expenses is broad. Remember, the purpose of the CalABLE account is to help the person with a disability build a savings account and stay independent.
Some of the disability-related expenses include:
- Housing: Rent, purchase of your primary home, mortgage payments and insurance, property taxes, utilities, repairs, maintenance, and improvements.
- Education: Books and school supplies, computers, tuition from pre-school through post-secondary schools.
- Transportation: Vehicle purchase and alteration, mass transit, and taxis.
- Health: This list is extensive. Some examples are health insurance premiums, medical and mental health expenses, medical equipment, rehabilitation, therapy, respite care, long-term services and support, and more.
- Assistive Technology: Cost or personal support and assistive technology for communication services, devices, and adaptive equipment.
- Other: Other categories included are legal fees, job-related expenses, financial management services, and the cost of gaining and maintaining employment.
How Much Money Can You Have in a CalABLE Account?
ABLE accounts are regulated by the various states, and each state has its own laws. The two most asked monetary questions are how much money you can put into an ABLE account each year and the maximum account balance allowed before any benefits are affected.
An eligible individual can put money into their ABLE account. And family, friends, and employers can also contribute to the account. The maximum amount that can be put into a CalABLE account without affecting the public disability benefits is $17,000.
And the eligible person is allowed to contribute additional funds if they are employed. In 2023, they can contribute an amount equal to their current year gross income, but only up to a maximum of an additional $13,590. The amounts for those working in Alaska and Hawaii are $16,990 and $15,630, respectively)
The maximum balance for the CalABLE account is more complicated. The maximum balance allowed is $529,000. However, some benefits will be affected when your account balance exceeds $100,000.
Your SSI will be suspended. And your eligibility to local and state programs might be affected by programs with means testing.
But your Medicaid/Medical balance will not be affected by your CalABLE balance. And earnings on qualified withdrawals from your CalABLE account are free from federal and California state taxes.
Advantages of an ABLE Account
There are several advantages to using an ABLE account for disability planning, including:
- Tax Benefits: ABLE accounts offer tax-free investment earnings and distributions for qualified disability expenses, providing significant tax savings over time.
- Supplementing Government Benefits: ABLE accounts allow individuals with disabilities to save money for qualified disability expenses without affecting their eligibility for government benefits such as SSI and Medicaid.
- Flexibility: ABLE accounts offer flexibility in how the funds are used, allowing individuals with disabilities to use the funds in a way that meets their unique needs.
- Independence: ABLE accounts can be opened and managed by an individual with a disability or by a parent or legal guardian if the individual lacks the capacity to manage the account. This promotes independence and autonomy for individuals with disabilities.
- Complementing Other Estate Planning Tools: ABLE accounts can be used in conjunction with other estate planning tools, such as trusts, to ensure that the individual with a disability is cared for after the passing of the account holder.
Disadvantages of an ABLE Account
While ABLE accounts offer many benefits, there are also some disadvantages to consider, including:
- Contribution Limits: The annual contribution limit for a CalABLE account is currently $17,000. This may not be sufficient for individuals with higher expenses related to their disability.
- Eligibility Criteria: Only individuals with a significant disability that was present before the age of 26 are eligible for an ABLE account. This may limit the availability of ABLE accounts for individuals who develop disabilities later in life.
- Qualified Disability Expenses: While ABLE accounts are designed to supplement government benefits without reducing eligibility, there are still some potential impacts on benefits to consider. Distributions from an ABLE account for non-qualified disability expenses might impact eligibility for SSI and Medicaid.
Alternatives to an ABLE Account
There are several alternatives to ABLE accounts that individuals with disabilities and their families can consider, including:
- Special Needs Trusts: Special Needs Trusts are a type of trust that holds assets for the benefit of a person with a disability without affecting their eligibility for government benefits. They offer more flexibility in how the funds are used than ABLE accounts and do not have a contribution limit. However, they can be more complex to establish and require ongoing management.
- Pooled Trusts: Pooled Trusts are similar to Special Needs Trusts but are managed by a nonprofit organization rather than an individual trustee. This can reduce the administrative burden and cost of managing a Special Needs Trust.
- Health Savings Accounts (HSAs): HSAs are tax-advantaged accounts that can be used to pay for qualified medical expenses. They can be used with other disability planning tools, such as Special Needs Trusts, to provide additional financial support for individuals with disabilities.
- Life Insurance: Life insurance can be used to provide for a person with a disability after the account holder's passing. Life insurance policies can be structured to provide ongoing financial support or a lump sum payment to a trust or other entity established to benefit the person with a disability.
- Medicaid Waivers: Medicaid Waivers are programs that allow individuals with disabilities to receive services and support in their homes or communities rather than in institutional settings. These waivers can provide significant support for individuals with disabilities and their families.
Is a CalABLE Account Right for You or Your Family?
If you or a family member has a disability and receives public benefits, a CalABLE account might be a good choice to help build up your finances tax-free. And it can be part of your family's estate-planning strategy.
CalABLE accounts are designed to help Californians with disabilities and offer powerful advantages. But they are not the only estate planning tools for a family with a person with disabilities.
Now is the time to take advantage of these estate planning strategies.
Because of complex federal and state laws and tax regulations, estate tax reduction planning can seem complicated and overwhelming.
Estate planning with a qualified California estate planning attorney is always the best option.
Let us help you choose the best options for you, your family, and your business.
At San Diego Legacy Law, our trust attorneys work closely with clients to evaluate their personal goals and available assets before incorporating trusts into their estate plans. Our founder, attorney Nicole D'Ambrogi, holds an LLM in International Taxation with concentrations in Financial Services and Wealth Management, which allows her to strategically analyze the many variables that can affect your ability to meet your estate planning goals instead of focusing on simple document preparation.
San Diego Legacy Law serves clients throughout San Diego and those in La Jolla, Del Mar, Rancho Santa Fe, El Cajon, Poway, Spring Valley, Chula Vista, Santa Rosa, Petaluma, Novato, and Healdsburg.
Contact us today to schedule a consultation to discuss your estate planning and asset protection needs.