Recently passed legislation helps families invest money tax-free for members with special needs without losing government benefits, but implementation may take a while.
Adam Zoll: For Morningstar, I'm Adam Zoll. Families of those with special needs will soon have a new way to save for their care. Here to discuss recent developments is Michael Duckworth. He is a private wealth manager with Merrill Lynch, who specializes in helping families with a member with special needs or a disability. Michael, thanks for joining us via Skype today.
Michael Duckworth: Thanks, Adam.
Zoll: So, we're here talking about a recently passed piece of legislation just this month called the ABLE Act. ABLE Act stands for Achieving a Better Life Expectancy Act. This has some key provisions of interest to families with members with special needs and disabilities. Can you tell us why it's significant?
Duckworth: Sure. So, what this type of account will allow families who have a disabled or special-needs family member to do is to accumulate resources for their future care. Now, what's really important is that as these funds accumulate they will not be disqualifying that person from needs-based programs like Medicaid or SSI. And without this type of structure, if you have more than $2,000 in your own name, you would be disqualified from those programs.
So, having an ability to do that will be extremely important as a tool for families that have a disabled member or people who are qualified as disabled but working and earning income and and wanting to do that and not disqualify themselves.
Zoll: And some of the reporting about this particular piece of legislation mentioned 529 college-savings plans. This is different from that. But can you explain in what ways they are similar and in what ways they are different?
Duckworth: Sure. They should not be confused with one another. They are very, very different, and I'm hopeful that the financial industry will do a good job of making sure there is no confusion. This type of an account refers to the same section of Internal Revenue Code, which is why the numbers 529 appear in some of the reporting around the law. They are similar in that money that gets put into one of these accounts accumulates free of the burden of income tax along the way as that money is invested, as it earns interest, et cetera. None of it will be taxed, so it will accumulate faster, which is similar to a college-savings program.
You're going to be able to put up to $14,000 a year into this account. You can only have one of these accounts, and it has to be established in the state where you live. So, money goes in; it accumulates free of the burden of income tax; and so long as you use it for a qualified expense for that individual, there is still no tax upon distribution.
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Zoll: And is that one account per beneficiary or one account that an individual can own?
Duckworth: One account per beneficiary. That's it.
Zoll: Let's talk about those qualified expenses. What are some of the expenses that a family would be able to use the ABLE account for?
Duckworth: This is the good stuff--what can I do with it once I accumulate it? And the standard looks like it is going to be very, very broad, so you will be able to use it for a lot of different expenses that occur for the disabled individual--things like transportation and housing, therapies that would not otherwise be covered. It's just about anything that relates to the care and support and medical services around that person, based on what has been printed already. Those would be qualified expenses.
Over the next six months, we'll get more clarification about the exact rules, but I think it's safe to say that this will be a very useful tool and have a broad mandate in terms of all of the things that it can be used for.
Zoll: Some families may already have a special-needs trust to help take on some of those costs that you just mentioned. Is this ABLE account something that would complement a special-needs trust or possibly replace it for those families?
Duckworth: It is very different from a special-needs trust or a supplemental-needs trust. And here are some of the big differences. So, this should not be thought of as a replacement for all families of special-needs planning. The ABLE account is going to be very limited in terms of how much money you can keep in it. Right now, you can only put $14,000 per beneficiary in it. And once you get to $100,000, anything over that amount will disqualify that person from SSI.
They can requalify once the value drops below $100,000, but $100,000 is an important limit there. The ABLE plan is also going to have a payback provision. So, what that means is that Medicaid in each state keeps track of the expenses that are incurred for the disabled individual over their life. And at that person's passing, this account will have an obligation to repay Medicaid for whatever expenses were incurred during their life.
Now, if there is money left over after that lien is satisfied, that money can then pass on to other family members or beneficiaries. But the first thing is that the state has to be paid back.
In a special-needs trust, you don't have an asset limit. You can have lot more than $100,000 and not be disqualified from SSI. You have a payback provision if you were using the funds of the disabled person to fund the special-needs trust. So, if a child receives money from an inheritance, for instance, and then creates one of these trusts, that type of trust--called a special-needs trust--would also have a payback provision to the state Medicaid agency.
On the other hand, if a mother or father or grandparent or loved one does planning that creates a trust for the benefit of a disabled person--called a supplemental-needs trust--it has the same features as a special-needs trust in that it won't disqualify that person from these needs-based programs. But the difference is, at the end of their life, a supplemental-needs trust does not have a payback clause; it can then go on to benefit other family members.
The money will never actually be an asset of the disabled person and, therefore, there's not an obligation for the repayment. So, it's clearly an area for families where they have a special family member to get advice. The creation of this tool, the ABLE account, is an awesome development, and we're really excited and proud in Pennsylvania that Senator Casey was a champion of this effort. But it doesn't replace the need for qualified advice from attorneys who spend all of their time or a significant amount of their time on these issues.
Zoll: Michael, any sense of what sorts of investments will be eligible for this kind of account? With a 529 college-savings account, you are limited to a certain investment menu--typically of funds, stock and bond funds. Is this going to be designed similarly or will it be more of an open architecture structure?
Duckworth: We'll have to see. But as I mentioned, each state is going to have to create their own version of the plan. It's possible for one state to contract with another if they just want to attach to whatever work another state is doing. But after all of that is determined and these states go out to try to determine who is going to administer their state’s program, only then will we know what the options are in each state, which was true with 529 plans. Each state had, in many cases, a mutual fund company or an asset manager that was the administrator of that state's plan. And it's likely that you'll see that kind of a structure here.
It's hard to say what the range of investment options is going to be, but I would presume that they'll look similar to what you see with 529 accounts--a variety of funds so that assets can be properly diversified to contemplate a wide range of circumstances.
Zoll: And you mentioned that it’s going to take a while for states to look at this law and decide how they are going to structure these accounts in their states. What's the earliest that families may be able to actually start opening these accounts?
Duckworth: I don't know, but I would not expect that it's going to be fast. There is a process that has to play out here where we get clarification on some of these important issues from the Internal Revenue Service around distributions. And once that's done, I think the states are then in a position to sort of determine how they want to implement in each case. Once that happens, then I think they're able to go out and find partners to help them administer their state's plan. And it's complicated work and it’s important work. And while I think everyone is anxious to have this tool, we should temper our expectations about how fast it can get done--just because it is extraordinarily complicated and it hasn't been done before.
So, if I had to guess, I would think that most states are going to be ready to go, I would guess, at the earliest in late 2015, but more 2016 and beyond. I think it'll probably take a few years to get everyone on some kind of a plan, but I'm guessing.
Zoll: Well, I know that families with members with special needs and disabilities have been waiting a while for this to finally pass. So, I'm sure they are going to be interested to hear this information. Michael, thank you so much for joining us today.
Duckworth: Thank you for having me, Adam.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.
