Among the many tools available to families of special needs children, an ABLE account (Achieving a Better Life Experience) is a tax-advantaged savings account intended to cover disability-related expenses. Its design allows for the accumulation of savings, without affecting eligibility for state and federal benefits, like Medicaid or Supplemental Security Income (SSI).
However, families should be aware of the potential for “clawbacks”, or claims by Medicaid to recover funds from the ABLE account after the beneficiary’s death. The state may attempt to clawback all or just a portion of the remaining funds, based on state guidelines.
Below we share tips on how to safeguard your child’s ABLE account from risk of clawback, while maximizing their necessary state and federal benefits.
Take Advantage of Special Needs Trusts
One of the most effective ways to protect the ABLE account from Medicaid recovery is by incorporating it into a broader estate plan that includes a Special Needs Trust (SNT), more specifically a Third-Party Special Needs Trust.
This type of trust is funded by parents, family members, or other third parties and cannot be subject to Medicaid clawback. Any remaining funds can be passed to family members or successor beneficiaries.
As trustee, you can maximize the use of an ABLE account for expenses that are better covered through a third-party SNT. This helps preserve the ABLE funds for daily expenses while protecting larger sums from potential Medicaid claims.
Spend Down ABLE Funds First
Encourage the use of ABLE account funds for qualified expenses during the beneficiary’s lifetime. By spending the funds as needed, the account balance is reduced, leaving less for Medicaid to claim later on.
Qualified disability expenses include education, housing, healthcare, transportation, and other expenses related to maintaining health and quality of life. It’s important to only use ABLE account funds for these purposes to preserve the tax-free status withdrawals. Remember to keep thorough records on how these funds were used in compliance with the QDE rules in case of an audit.
Contribute Regularly, But Within Limits
Since Medicaid can only recover funds left in the ABLE account after death, keeping a manageable balance in the account reduces the risk of large recoveries.
For 2024, the maximum annual contribution limit for an ABLE account is $18,000. Contributions can come from family, friends, or even the beneficiary themselves, but should not exceed this annual cap.
If your child is employed, the ABLE to Work Act includes provisions that allow for additional contributions above the $18,000 threshold if the employee does not contribute to an employer-sponsored retirement plan. Employed individuals with disabilities can contribute an additional $14,580 more to their ABLE account in 2024.
Educate Family Members on Estate Planning
A comprehensive estate plan helps ensure assets are managed properly. Educate family members on the importance of contributing to the third-party SNT rather than directly to the ABLE account.
Contributions from family members, friends, or third-party sources should be limited to amounts that cover short-term needs. Any long-term savings intended for an individual’s future can be placed into a third-party SNT to avoid risk of recovery.
Monitor State-Specific Rules
Medicaid recovery rules vary by state, so trustees should regularly review the rules where the beneficiary resides. Some states may not aggressively pursue Medicaid recovery from ABLE accounts, while others might.
Michigan, Oregon, Alabama, Florida, Pennsylvania, Colorado and Virginia have prohibited Medicaid-related recoupment via key legislation, while others handle clawbacks differently. Massachusetts, for example, “may or have the potential” to clawback a portion of the account.
For California residents, California law prevents Medi-Cal from seeking reimbursement directly from CalABLE accounts of California residents, unless required by federal law. However, the state may recover on assets that have transferred to the estate on death and which are subject to a formal probate. More specific rules on this can be found here.The ABLE National Resource Center is a handy resource for comparing ABLE account parameters across different states.
Some states don’t even offer ABLE accounts to begin with. (Hint, if you live in Idaho, North Dakota, South Dakota, or Washington you should seek out an ABLE program that accepts outside residents.).
Key Role in Your Planning
Navigating the complexities of ABLE accounts requires expertise and diligence. Trustees should consult with a qualified estate planning attorney and a financial planner experienced in special needs planning. These professionals can help you understand how to optimize your child’s ABLE account, while minimizing exposure to Medicaid recovery.
At Prudent Investors, we offer support tailored to the unique needs of families managing special needs trusts. Our team is dedicated to assisting you in creating and implementing effective strategies that safeguard the financial future of your child, ensuring their needs are met without compromising important benefits.
If you’re interested in a no-obligation consultation on aligning your child’s special needs trust with their ABLE account, we invite you to contact Prudent Investors today.
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