The structure of government entitlement programs puts individuals with disabilities and their families in a difficult situation. The programs discourage these individuals from earning and saving money since doing so may jeopardize their eligibility for critical public benefits. Here are a few avenues to consider to mitigate that risk.
I. The ABLE Act
In December 2014, Congress passed the Achieving a Better Life Experience Act (ABLE Act). The law is aimed at encouraging people with disabilities to save money for long-term expenses, and it is scheduled to go into effect in 2015. The goal of ABLE is to provide a way for people with disabilities to save money without losing access to much-needed benefits.
Prior to the passage of the Act, a child diagnosed with a disability would forfeit eligibility for government programs like Medicaid and Social Security if she or he had assets worth more than $2,000 or earned more than $680 per month. The ABLE Act changes that, allowing persons with disabilities to work and save up to $100,000 of their earnings in an “ABLE account” without their eligibility for entitlement programs being affected. An ABLE account is a tax-free savings account. Funds in an ABLE account can be used for education, housing, transportation, employment support, health and wellness expenses, assistive technologies, and other miscellaneous expenses. Notably, the Act contains a “Medicaid Payback Provision.” This means if the beneficiary dies or is no longer disabled, the funds that remain in the ABLE account are used to “payback” any state Medicaid expenses incurred.
Eligibility for an ABLE account requires a serious disability that began affecting the individual prior to them turning 26. If you meet this criterion and are already receiving benefits under Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), you are automatically eligible to establish an ABLE account. If you are not a recipient of SSI or SSDI, you are still eligible to open an ABLE account if:
- You have a serious disability with an age of onset prior to age 26, and
- You meet SSI criteria regarding “functional limitations.”
- To demonstrate that you meet the “functional limitations” criteria, a disability certification must be filed on your behalf. Here, a parent or guardian generally certifies that (1) the individual has a medically determinable physical or mental impairment, (2) the impairment results in marked and severe functional limitations, and (3) the impairment can be expected to result in death, or has lasted or can be expected to last for a continuous period of at least 12 months.
Given this law was passed very recently, there are still steps that need to be taken before families can start saving. Every state is currently deciding how to implement the ABLE Act and make the savings accounts available to its residents. By the end of 2015, states should be accepting applications to establish ABLE accounts.
II. Special Needs Trusts
Special needs trusts, also known as supplemental needs trusts, are trusts designed for beneficiaries who are disabled, either physically or mentally. The trust is written for the sole benefit of a disabled beneficiary and is administered by a trustee. This allows the beneficiary to enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits. These trusts generally require legal and financial guidance to set up and maintain.
Special needs trusts differ from ABLE accounts in a few key ways. They generally require more resources to set up and maintain. For example, an attorney is generally involved in establishing the trust, and a trustee is appointed to administer it. In addition, the trusts are taxed at the highest individual tax rate. On the other hand, there are no contribution limits to special needs trusts, and the allowed expenditures are not as limited as those in the ABLE Act. You can contact a “trusts and estates” or “special education” attorney for guidance on setting up a special needs trust.
III. Pooled Trusts
Pooled Trusts are another resource available to people who want to earn and save money without forfeiting eligibility for government programs. A group of individuals come together to establish a pooled trust. Each individual has a separate account within the trust, but for the purposes of investment and management of funds, the accounts are pooled. Pooled trusts are organized and maintained by nonprofit organizations. They are generally less expensive to set up than special needs trusts, and the organizations that maintain them are a good resource given their experience in the area. There are no contribution limits to pooled trusts, and the allowed expenditures are not as limited as those in the ABLE Act. Upon the death of the disabled beneficiary, if there are funds remaining in the beneficiary’s subaccount, they can remain in the trust for the benefit of the other trust members.
For more information on participating in a pooled trust in Pennsylvania, visit http://arctrust.org/.