According to the United States Census Bureau, millions of Americans suffer from physical and mental disabilities. Such a disability can result from accidents, such as automobile accidents or medical malpractice, or stem from birth defects or developmental delays. Many families with special needs children or adults seek to provide their disabled family members with financial support (i.e. through an inheritance) to enhance their quality of life. However, leaving assets to a disabled family member without proper planning can cause disastrous problems, including jeopardizing your loved ones ability to receive government benefits. Proper planning can secure a disabled beneficiary’s future by providing financial support, without adversely affecting their entitlement to government benefits.
Until recently, federal and state law made it difficult for disabled individuals to save for disability-related expenses and individuals and families faced the loss of their government benefits if savings exceeded certain limits. On April 18, 2016, Governor Wolf signed into law the Pennsylvania Achieving a Better Life Experience Act (PA ABLE Act), which allows disabled Pennsylvanians to establish special needs savings accounts. The PA ABLE Act authorizes a disabled individual, or someone on the individual’s behalf, to establish an account for the benefit of the disabled individual. The funds placed in the account grow income tax free, and, if certain conditions are met, the ABLE account will not disqualify the individual from receiving government benefits such as Medicaid or Supplemental Security Income (SSI).
To be eligible for a PA ABLE account, the individual’s disability must have occurred prior to age 26. Benefits under the new law include the following:
- Each year the disabled individual, or another person acting for the disabled person’s benefit, may aggregately contribute up to the federal gift tax exclusion amount (currently $14,000).
- The account grows income tax-free.
- Withdrawals from the account are income tax-free when used for qualified disability expenses.
- The account is exempt from Pennsylvania inheritance tax.
- The savings in the account up to $100,000 are excluded from eligibility determinations for Medicaid, SSI and other government benefits.
The funds placed in the PA ABLE account must be used for government approved disability related expenditures which include housing, transportation, employment training, education, health and wellness. Upon the account holder’s death, Medicaid, but not SSI, must be repaid from the account for the cost of services provided to the beneficiary during his/her lifetime. Any amounts remaining in the account after payback are distributed to the designated beneficiaries of the account.
Special needs planning should not be undertaken without a thorough examination of client’s family circumstances and the assistance of experienced professionals who understand the intricacies of the rules. When Decisions Matter contact our Estate Planning Attorneys with any questions concerning the PA ABLE Act, Special Needs Trusts, or any estate planning matter.