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Legislation Broadens Access to ABLE Accounts

The recently enacted Consolidated Appropriations Act of 2016 includes a subsection that eliminates the state residency requirement for Achieving a Better Life Experience (ABLE) accounts, dramatically increasing the availability of this potentially attractive planning option.

The new legislation, by removing the state residency requirement, not only opens up the use of ABLE accounts to individuals who live in jurisdictions where they previously weren’t available (15 or so at the time of publication), but it also allows individuals to set up an ABLE account in any state, regardless of their state of residence, based on which state program's best meets their needs. (An individual can only open one account total, however.) The ability to forum shop in this manner should, if the Trust business is any indicator, ultimately lead to ABLE accounts becoming an increasingly attractive option, as states will likely compete to provide the most attractive laws for potential enrollees.

ABLE accounts are a new form of tax-free account, similar to a 529 qualified tuition plan (QTP), for individuals who become disabled before they reach the age of 26 to pay for certain qualified expenses. The main advantages of using an ABLE account, as opposed to the more-established special needs trust (SNT), are ease of creation, cost and agency. ABLE accounts don’t require a lawyer for drafting; they're cheap to establish and can be set up by the beneficiary himself. (SNTs have to be set up by a third party for the benefit of an individual with a disability.)

ABLE accounts do have some drawbacks, including limits on annual contribution size (up to the exemption) and aggregate contribution, both of which closely track the same state-based limits placed on the 529 QTPs on which ABLE is modeled, a requirement where, at the death of the beneficiary, all remaining funds must be used to repay any state Medicaid plan used after the account is established and the aforementioned state residency requirement.

Ultimately, there’s room and use for both vehicles. For those who can afford it and have a third party willing to set it up, the flexibility and lack of limitations (no age limit, no contribution caps, no repayment in the case of third-party SNTs, etc.) make an SNT the superior option in many cases. However, ABLE accounts do have a niche among younger, less wealthy and more self-reliant individuals with disabilities. They also offer particular value to working disabled individuals who often face a difficult balancing act in trying to save their wages without losing access to their supplemental security income and Medicaid benefits.

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