Financial Planning for Children With Disabilities

We’re honored to have a guest post from Stephanie Hoffer. Stephanie is a professor at The Ohio State University Moritz College of Law. She is an educator, a scholar, and an advocate, and arguably the preeminent authority on the ABLE Act. We’re excited that she’s agreed to introduce us to this important new law.

My son George is a bright shining star. He is almost five, and he loves to read out loud, play the harmonica, and paint. He also happens to have Down Syndrome. He is smart, funny, and loving, and I can’t imagine life without him. I am grateful every day for the privilege of being his mom. And like any other mom of any other child, I worry every day about his future.

Our life with George hasn’t always been easy. On the day that he was born, a social worker came to our hospital room and told me that we should do two things right away: apply for Medicaid and write George out of our will. I was stunned. I choked back the inevitable tears and asked why. “Because,” she replied, “they are really expensive.” Stung by the label “they,” and hurt by the thought of not being able to save for my precious baby’s future, I asked her to please leave. 

Later, other moms gave me the same advice. Many individuals with developmental or other disabilities rely on social services, like job assistance, transportation assistance, and coordination of medical care, to remain independent in the community. These social services commonly are paid for, at least in part, with federal Medicaid dollars. As a result, individuals who require disability-related services often must qualify for Medicaid in order to receive them. Disability-related services typically are not covered by private health insurance, and in many parts of the country, it is difficult to purchase and coordinate these services privately.

Medicaid eligibility rules are strict. In order to qualify, individuals with disabilities must have very little income, and almost no assets. In many states, an individual cannot have more than $1,310 in earned income each month and no more than $2,000 of total savings. And gifts of money given by family and friends are treated as income, which jeopardizes the loved one’s eligibility. Furthermore, the Affordable Care Act did nothing to help people in this situation.   While a person with a disability may qualify for medical coverage under the Medicaid expansion, access to disability-related services is not included. For those services, a person must qualify under the older, more Draconian rules.

The Medicaid eligibility rules create obvious problems for individuals with disabilities who have the potential to work with the aid of disability-related services. Earning income means losing services, and losing services means getting fired. A less obvious problem, though, arises for individuals with disabilities who are unable to work. Even though these people may have no earned income, family inheritance may disqualify them from Medicaid. This problem affects not only the wealthy, but anyone who stands to inherit more than $2,000 upon the death of a loved one.

Until recently, parents and individuals with significant disabilities had two basic estate planning options to preserve Medicaid eligibility: the responsible sibling or the special needs trust. Leaving money with a responsible sibling is risky. It is exposed the sibling’s creditors. It can be lost in a divorce. If the sibling dies, it might be dispersed.   But putting money in a special needs trust isn’t much better. Although the money is protected from creditors, the Medicaid law requires that the trustee have absolute discretion over the money and that the money not be used for expenses that could be covered by government programs. In other words, an individual who is a beneficiary of a special needs trust can never demand money from the trust, and if the trustee decides to distribute money, the individual beneficiary cannot use it for ordinary adult expenses like rent, groceries, or even some utilities.

It was against this bleak backdrop that Congress passed the ABLE Act last December. It was a watershed moment for many individuals with serious disabilities.  The new law permits states to create tax-preferred savings programs similar to § 529 college savings programs.  To date, over thirty states have passed enabling legislation and several more have introduced bills. Importantly, contributions to the account, investment earnings inside of the account, and qualified distributions from the account are not counted against Medicaid eligibility. With an ABLE account, parents can save for a child’s future and adults can have meaningful employment without jeopardizing their eligibility for Medicaid.

An individual is eligible to open an ABLE account if she has a severe disability with an onset date prior to age 26.  Parents can also open the account on an individual’s behalf, even if that person is an adult. Each eligible beneficiary can have only one account. Deposits to the account are not deductible for federal income tax purposes, but investment earnings inside of the account are tax free. In addition, some states may provide tax deductions for contributions, similar to college savings contributions. The tax benefit isn’t the important part though. Rather, ABLE accounts allow beneficiaries to spend their own funds on costs that previously would have disqualified them from Medicaid, like groceries and rent.

Money in an ABLE account can be used for “qualified disability expenses,” which are defined broadly as “any expenses related to the eligible individual’s blindness or disability.”  They include education, housing, transportation, personal support, health & wellness expenses, and a number of other things.  According to the IRS, even everyday expenses may qualify.  For instance, a “smart phone” could be disability-related because it is “an effective and safe communication or navigation aid for a child with autism.” Of course, if an ABLE beneficiary uses money from the account for a non-approved expense, that money counts as income for purposes of determining Medicaid eligibility. It’s also subject to a 10% federal tax penalty. If any money remains in the account at the end of the beneficiary’s life, it goes first to repay Medicaid, and whatever is left over can go back to the family.

The ABLE Act is a huge improvement over the law prior to its passage.  It allows individuals with disabilities to cover their own expenses—something that was much more difficult under the old rules—and it helps them save.  I advocated for the law’s passage in my home state of Ohio, and I was thrilled when it passed.  But the law isn’t perfect, and Congress and the states could do more to help individuals with disabilities who are among the most vulnerable in our communities.  For instance, the new law does very little for families who have no spare cash to save. In addition, contribution limits on the account prevent parents and individuals with disabilities from saving as much money as they will need for retirement, which is troubling, since many will not significantly contribute to Social Security during their working lives. And because the account can only take relatively small amounts of money at any given time, parents in my position still have to disinherit their children, which sends a terrible message about how society values relationships of dependence among family members versus dependence on the government.

So what are the contribution limits? An ABLE account can accept no more than the federal gift tax exempt amount per year ($14,000 in 2015), and over the account’s lifetime, it can receive no more than the state’s applicable limit for college savings accounts (typically in the range of $300,000 – $400,000). Not only do these limitations cause problems when it comes to planning for the death of a parent, but they bear no relation to the cost of living one’s life with a disability.

Placing contribution limits on the ABLE account, which protects access to services needed for independence and work, makes very little sense in a society that values those things.  A better solution would have been to remove the account’s contribution limits. Since any money left in the account goes to repay Medicaid, Congress should want to encourage high balances in ABLE accounts, not limit them. Or better yet, Congress could allow everyone with a significant disability to have access to Medicaid’s coordination and discount buying power for disability-related services either without regard to income and savings, or through a buy-in program (which exists, but only to a very limited extent, in some states). Allowing greater access to disability-related services would go further toward inclusion of individuals with disabilities in the community and workplace, and it may even save the government money as individuals with disabilities rely less on the government and more on their own earnings and their own families.  So while the ABLE Act was a tremendous step forward for individuals with disabilities, more work remains to be done.

In the meantime, state treasurers’ offices are hard at work designing the very welcome addition of ABLE programs to their portfolio of services. If you are interested in opening an account, check your state treasurer’s website. Some states’ programs are expected to be up and running as early as the first quarter of 2016. In Ohio, George and I are waiting with joy.