The New Jersey Achieving a Better Life Experience (ABLE) Act became law on January 11, 2016, it becomes effective on October of 2016. While due to its limitations it does not replace the special needs trust, it will be a cost effective way to assist individuals with disabilities.
Under the new Act the New Jersey’s Department of the Treasury and the New Jersey’s Department of Human Services must establish the ABLE Program pursuant to federal law. Under the program, individuals who became disabled before they attained the age 26 and who are also able to meet the disability requirements for Social Security disability benefits are permitted to establish an ABLE account, and they themselves can be the beneficiary of that account. The purpose of an ABLE account is to enable people with disabilities and their families to save and pay for disability-related expenses.
An ABLE account is not subject to state income tax, and it will not be considered to determine the beneficiary’s eligibility for need-based public benefit programs or to determine the level of any benefit provided under such a program. However, a disabled individual can only have one ABLE account established for their benefit.
Contributions can be made to an ABLE account on an annual basis in a total amount up to the annual gift tax exclusion amount, currently $14,000. Distributions from an ABLE account are tax-free if used to pay “qualified disability expenses.” Expenses are qualified disability expenses if they relate to the beneficiary’s blindness or disability and help the beneficiary to maintain or improve their health, independence and quality of life. For example, qualified disability expenses can include employment training and support, assistive technology, housing, education, transportation, health, prevention and wellness, and personal support services, among other things. It is important to note that if even one penny over the $14,000 limit is deposited into an ABLE account in any given year, then the entire account is disqualified as an ABLE account.
An ABLE account holding up to $100,000 is not counted in determining the beneficiary’s eligibility for needs-based public benefit programs. If the account has over $100,000, it may disqualify the beneficiary from eligibility for the public benefit. When the beneficiary dies, any funds remaining in an ABLE account must be used to repay the public benefit providers for all amounts the public benefit providers spent on the beneficiary. If the beneficiary is not receiving public benefits, then the account may hold up to the State’s limit for a 529(b) plan, which, in the State of New Jersey is currently $305,000.
An ABLE account is a useful tool to assist people with disabilities. However, ABLE accounts have significant limitations which prevent these accounts from replacing a special needs trust. Due to the limit on annual contributions ($14,000) and the total account balance limit ($100,000), Special needs trusts will still be needed to protect larger amounts for use by the beneficiary, such as inheritances and proceeds received as a result of a lawsuit settlement or trial. Also, though ABLE accounts must repay public benefit providers for public benefits received by the account beneficiary, third-party special needs trusts have no obligation to repay.
If you have any questions about planning for people with disabilities of special needs, please call me at (973) 890-0004.