For years, it was common to disinherit a child who received Supplemental Security Income (SSI) or Medicaid as a result of disability. The theory was that if the child inherited anything, they would lose their benefits. So, for many years, the only way to preserve benefit eligibility was to make sure the child did not inherit.
Estate planners devised ways to still give an inheritance to children on disability by creating trusts within an estate plan for the sole benefit of the child that named a third party as trustee with the sole discretion to decide how to spend the money. For those that did not get to their attorney to devise such a trust within their estate plan, a federal law change in 1993 allowed for the creation of Medicaid Payback Trusts with the use of money inherited from a family member (or any other assets belonging to the child on disability). These Medicaid Payback trusts have stringent rules as to how they can be created and who can create them. However, it has been a planning technique used to “clean up” an inheritance that was not fixed before the parent died. The problem, is that once the child dies all money left in the trust must be used to pay back the State Medicaid program.
To alleviate some of the angst of planning for a child on disability, the federal government in December 2014 enacted new legislation to allow for the gifting of $15,000 per year to a savings account for the benefit of a child with a disability that began before the age of 26. An ABLE Act (Achieving a Better Life Experience Act) account, which will be similar to a 529 account for educational expenses, is designed to allow parents to transfer this amount of money per year to an account that will not jeopardize benefits for the disabled child. The value of the account cannot be greater than $100,000. An ABLE Account can be used, tax free, for the medical, education, housing, and transportation costs of the disabled child.
An ABLE account should not be the silver-bullet due to its value limitations. Therefore, it is always of the utmost of importance to consider and re-evaluate your overall estate planning at leave once every ten years or after a life changing event occurs for you or a loved one. ABLE Accounts are established by the states, similar to how 529 plans are administered.
However, if the disability arose after the age of 26 or if there are more assets to be used as part of a disability account (i.e. an inheritance or personal injury settlement), then an ABLE Account may not be appropriate to the situation. In those instances, a “Special Needs Trust” may be necessary to preserve access to government benefits.