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The Achieving  a Better Life Experience Act was signed  into  federal  law at the end of 2014,  and Arizona’s versions,  HB 2388, was signed into law by the Governor  on May  12, 2016, and will became effective on August 6, 2016.  What does this legislation mean for people with disabilities, and for their families? How will you be able to use the accounts authorized by the ABLE Act?

The  ABLE Act is loosely connected  to    ection  529 of the Internal Revenue  Code.  You might recognize that number- the prior law created very popular accounts for prepaid tuition. There is lots of information about 529 Plans, including the popular “Saving  for College   websight. To better understand  ABLE, it might make sense to first describe how 529 plans work.

529 Plans

There are dozens of 529 Plans available. Almost every state has adopted at least one 529 Plan (some states have more than one). They often look very much like mutual funds; you put your money into the account, it is managed by the administrator, and it grows along with the market ( or the segment of the market utilized by your particular plan).

You  can invest  your money  in  a 529  Plan  set  up by a state  other  than  yours,  or where  your prospective  student lives. Not every state’s plan allows out- of-state investments, but most do. There are also “Prepaid Tuition” plans available in many sates; they are just what the name implies, though usually the funds can be used for other colleg when the time comes (though

there may be incentives to keep the money, and the student, at the predetermined  college). You can set up a 529 Plan for, say, your child- and both sets of grandparents can set up separate accounts for the same student. The multiple plans for a given child can be different states, The maximum  asset limit is set in each plan; if you make more than a $14,000 contribution to a plan for a given student in one year, you may have to file a federal gift tax return.

If you do set up a 529 Plan for a child or grandchild, and that prospective  student dies, decides not to go to college, or gets a really good scholarship, you can change your beneficiary  of your plan to another family member. You keep pretty impressive control over the plan- and yet it is not considered part of your estate for federal estate purposes.

Though  you do not get any income tax deduction when you do set up a plan, any later withdrawals for qualified education expenses come out of the plan tax-free. That means that no one has to pay the income tax on the interest and investment income over the years the plan is in place, That’s one of the best parts of a 529 Plan.

ABLE Accounts

The new ABLE Accounts will be similar to 529  Plans in  a number  of ways, but very different in others.  In fact the ABLE Act creates  a new section, right after Section 529, of the tax code. Its numbered as Section 529A,just to make the connection clearer. Here are some of the highlights of the new Section 529A:

  • A person with a disability can only have an ABLE Account if they were disabled by Social
    Security standards by age 26.
  • Each person with a disability can have just one ABLE Account
  • An account can be set up and directly controlled by the beneficiary,  the parent of a minor beneficiary, a guardian/conservator, or agent acting under a power of attorney.
  • Contributions to an ABLE Account  may not exceed $14,000  in  a given year. That’s  total contributions.   That figure  is indexed to the maximum  annual  gift tax  exclusion  amount (though gift taxes are mostly irrelevant to ABLE Accounts), so it should go up to $15,000 in a year or two.
  • The maximum  size  of an ABLE Account is  $100,000.  If the account  grows to more than
    $100,000 the beneficiary will lose Supplemental Security Income (SSI) benefits- but not state
    Medicaid eligibility.
  • When the ABLE beneficiary dies, remaining assets in the account go to the state Medicaid program  which provided  benefits  during life (  after payment  of other pending  bills,  and limited to the amount of the Medicaid program actually paid for the beneficiary’s care.)
  • If ABLE Account funds are used to pay for “qualified disability expenses,” there will be no
    income taxation on the interest or gain in value of the ABLE assets, and the expenditure will not be counted as income to the beneficiary. Categories for “qualified”  expenditures include
    ‘education, housing, transportation, employment training and support, assistive technology and personal  support services, health, prevention  and wellness,  financial management  and administrative  services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.”

Arizona has enacted legislation implementing ABLE but has not yet established  such an account but it is on the horizon.   It’s coming!   In the meantime, several other states that have ABLE accounts available accept out-of-state beneficiaries.   For the up-to-date information, check out the ABLE National Resource Center at the following link:

 

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