ABLE Accounts

Recently my old roommate from our Rutgers days alerted me to the plight of special needs trusts in New Jersey. Apparently the state, on the lookout to make revenue somewhere, has written to trustees of these trusts advising them that they may no longer be in compliance with New Jersey law. These trusts were established for the benefit of persons with special needs providing payments on their behalf which would not void state Medicaid qualification. These trusts were not established as estate planning or tax avoidance tools. When used properly, these trusts simply made the life of persons with special needs more bearable. They also provided some relief for the family knowing that the needs of the person could be met during their lifetime. I am writing here outside my field as I have never been a draftsman of such a trust. However, I realize the importance of a new significant tax change that may benefit persons with special needs. This is the creation of the ABLE account. Similar to college savings plans is the tax-free ABLE savings account. Starting in 2015 states can set up these programs so families can set aside funds to help the long-term disabled maintain their health, independence and quality of life. Nondeductible contributions to ABLE accounts up to $14,000 a year will be allowed for those who became blind or disabled before age 26. Account owners would remain eligible for Medicaid and account balances of $100,000 or less would not affect SSI benefits. Withdrawal from these accounts will be tax-free if the funds are used for housing, education, transportation, job training and similar expenses. This includes payouts from account earnings. If  spent for nonqualified purposes such payments will be taxed and subject to a 10% penalty. Rollovers will be allowed to another ABLE account for that individual or a disabled sibling. Upon the death of the account beneficiary amounts left in the account would first go to the state to recover some of its Medicaid costs and the balance to a designated beneficiary. Such beneficiary would owe tax on the account earnings but would not be subject to any penalty.