Wisconsin residents may soon have a tax-advantaged way to save for the expenses of disabled family members. A new federal law allows states to create “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. ABLE accounts are similar to Section 529 Educational Savings Accounts (i.e., Edvest accounts). On May 17, 2015, Rep. John Macco and Sen. Howard Marlein introduced the Achieving a Better Life Experience bill (AB236 and SB165) in the Wisconsin legislature which, if passed, will enable the creation of ABLE accounts in Wisconsin.
Here are some of the key features of ABLE accounts:
- An ABLE account can only be created for the benefit of an individual who became blind or severely disabled before turning 26.
- If an individual meets this criteria and is also receiving Supplemental Security Income (SSI) or Social Security Disability Income (SSDI) benefits, the individual is automatically eligible to establish an ABLE account.
- At the present time, it is unknown what individuals who are not receiving SSI and/or SSDI must do in order to establish that they are eligible for ABLE accounts.
- There can only be one beneficiary per ABLE account.
- Contributions to ABLE accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free.
- Money in an ABLE account can be withdrawn tax free if the money is used for the qualified disability related expenses of the beneficiary (e.g., education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; etc.).
- Distributions used for nonqualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on that portion.
- Each disabled person is limited to one ABLE account, and the total annual contributions by all individuals to any one ABLE account is limited to the annual gift tax exclusion amount ($14,000.00 in 2015, adjusted annually for inflation).
- ABLE accounts have no impact on Medicaid and the first $100,000.00 in an ABLE account is exempted from being counted toward the SSI program’s $2,000.00 individual resource limit–an ABLE account beneficiary will be suspended, but not terminated, for SSI eligibility if his/her ABLE account has more than $100,000.00 of assets in it.
- When the beneficiary dies, any amounts remaining in his/her account (after any reimbursements to Medicaid) will go to his/her estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.
After the enabling legislation is passed, there will still be a lot of details to work out regarding the creation and impact of ABLE accounts in Wisconsin. However, once ABLE accounts are available in Wisconsin, they will provide Wisconsin families with a good alternative to special needs trusts.
If you have any questions about how the information in this article may affect you or your family, please contact Carolyn A. Hegge at chegge@stroudlaw.com or (608) 257-2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.