The North Carolina legislature recently passed changes involving ABLE accounts that are being widely promoted as a positive development for families dealing with disabilities and special needs planning. On the surface, the changes sound extremely appealing because they are intended to limit or eliminate Medicaid Estate Recovery claims against certain ABLE account funds after the death of the beneficiary.
Why These Changes Sound So Appealing
Many families hear that and understandably assume this means ABLE accounts have now become safe long-term places to accumulate inheritance money for disabled children and other loved ones receiving government benefits.
Why Caution Is Still Essential
While I certainly understand why families are excited about these changes, I also believe people need to approach this issue very carefully because one of the biggest mistakes in estate planning is assuming today’s rules will still exist years from now when the plan actually matters.
One of the reasons I am cautious about this issue is that I have seen firsthand what happens when attorneys try too hard to draft around the exact wording of current government benefit rules instead of focusing on long-term planning principles that can survive changing laws and changing circumstances.
A Cautionary Tale: When “Smart” Planning Backfires
Several years ago, an uncle brought his nephew into my office for what he described as a “second opinion” regarding a special needs trust administration problem. The nephew’s parents had both died unexpectedly in a car accident, and before their deaths, they had worked with a large law firm to prepare their estate planning documents. According to the uncle, much of the planning had been handled by a newer associate attorney who apparently wanted to demonstrate a detailed understanding of Medicaid and SSI eligibility rules.
The Attorney’s Rule-Specific Strategy
At the time the documents were drafted, the attorney had focused heavily on the fact that a disabled individual could generally retain approximately two thousand dollars in countable assets, one vehicle, and a primary residence without immediately losing certain government benefits. Instead of keeping all of the assets inside a properly drafted discretionary special needs trust, the attorney attempted to tailor the plan directly to the rules that existed at that specific point in time. The trust directed that the special needs son receive the family home outright, a vehicle outright, and approximately two thousand dollars outright, while the remaining assets stayed in trust.
On paper, I am sure the attorney believed this approach was sophisticated and efficient because he was attempting to maximize what the son could own personally while still preserving eligibility for benefits.
The problem, however, was that real life did not freeze in place simply because the documents had been signed. By the time the parents had passed away, and the trust administration became active, years had gone by. The son already owned a vehicle. He already had money in his own account. More importantly, Medicaid laws and eligibility rules changed. The uncle explained to me that the previous attorney was now telling him that the inherited house had become a “problem” with Medicaid, and that, as trustee, he needed to take out a mortgage against the property on behalf of his nephew and spend the proceeds down in order to restore Medicaid eligibility.
The uncle sat in my office visibly frustrated, and told me that the entire situation sounded insane to him because the parents had specifically hired professionals to avoid creating exactly this type of problem for their son.
The Real Problem with Tailoring Plans to Today’s Rules
Unfortunately, I had to explain to him that the problem was not that the original attorney failed to understand the rules. In many ways, the attorney understood the rules too well. The problem was that the attorney became so focused on demonstrating knowledge of the current rules while ignoring the long-term planning principle that assets should always be in the discretion of the trustee from the beginning. Instead, the attorney tried to look clever to his clients by engineering the inheritance around a snapshot of government regulations at that particular time. Once the assets passed outright to the beneficiary personally, the flexibility of the trust structure was lost, and future changes in circumstances became much more difficult to manage.
That experience has stayed with me for years because it perfectly illustrates why families should be cautious whenever government agencies, legislators, or financial institutions start encouraging people to heavily rely on any particular government-benefit strategy based on today’s rules instead of the time-tested overriding rules.
Federal Law Still Creates Risk for ABLE Accounts
This brings us back to the recent North Carolina changes involving ABLE accounts. While the North Carolina legislature appears to be attempting to protect ABLE accounts from Medicaid Estate Recovery under state law, families should understand that federal Medicaid law still contains language stating that the state “shall” seek recovery against certain amounts remaining in an ABLE account after the beneficiary’s death.
Lawyers can debate how those laws interact, how aggressively recovery will be pursued, or whether North Carolina’s interpretation will ultimately prevail, but the larger issue is that families are once again being encouraged to rely on current government policy remaining favorable indefinitely into the future.
Why Relying on Current Government Policy Is Risky
That is not a gamble I believe families should make when planning for a disabled child or loved one who may depend on benefits programs for decades. Governments change. Administrations change. Budget pressures change. Legislatures facing financial shortfalls often revisit programs that were previously considered protected. A strategy that sounds perfectly safe today may become a serious problem years from now after political priorities or financial pressures shift. The lesson from the story involving the special needs son was not merely that one attorney made a drafting mistake. The real lesson was that planning should focus on durable principles instead of trying to outsmart a constantly evolving system.
How Families Should Use ABLE Accounts Going Forward
For that reason, my recommendations regarding ABLE accounts remain largely the same even after these recent North Carolina law changes. I believe ABLE accounts can be very useful tools when used appropriately, but they should generally be viewed as management tools rather than long-term inheritance repositories. In many situations, an ABLE account works best when a disabled beneficiary uses it to temporarily hold funds necessary to remain below mandatory asset limits while then utilizing those funds for the beneficiary’s own benefit under the applicable rules.
What to Avoid: Using ABLE Accounts for Major Inheritance
What concerns me is when families begin viewing ABLE accounts as substitutes for properly drafted discretionary trusts or as permanent locations to accumulate significant inherited wealth. Similarly, I generally do not recommend that parents, grandparents, or other family members “donate” substantial inheritance funds directly into ABLE accounts simply because state agencies or officials encourage it. Families need to remember that once funds are placed into systems heavily controlled by government regulation, those funds remain vulnerable to future rule changes, future recovery laws, and future interpretations that may look very different from today’s political promises. In my opinion, families should be extremely cautious about relying on government restraint when future budget pressures arise.
Why Discretionary Special Needs Trusts Remain the Strongest Foundation
Most importantly, I continue to believe that estate plans for parents of special needs children should still be built around properly drafted trusts that keep inherited assets under the sole discretion of the trustee whenever appropriate. That fundamental planning principle has survived decades of changing Medicaid rules, changing SSI rules, changing tax laws, and changing political administrations precisely because it preserves flexibility instead of relying on assumptions about what the government may or may not do years later.
The families who usually suffer the greatest financial damage are not necessarily the ones who ignored the rules entirely. Often, they are the families who relied too heavily on the exact wording of rules that later changed after it was too late to fix the plan.