ABLE accounts offer valuable benefits during a person's lifetime, but it's important to understand what happens to the remaining funds when the account holder passes away. Knowing the rules can help families plan ahead and avoid surprises during an already difficult time.
In this article, we'll cover:
- What happens to ABLE account funds after death
- Understanding the Medicaid payback requirement
- How remaining funds can be used
- Naming a beneficiary for your ABLE account
- Planning ahead to maximize benefits
1. What Happens to ABLE Funds After Death?
When an ABLE account beneficiary dies, the account doesn't simply transfer to heirs like a regular savings account. Federal law establishes a specific order in which remaining funds must be handled:
- Outstanding qualified disability expenses are paid (including funeral and burial costs)
- Medicaid payback is satisfied (if the state files a claim)
- Remaining funds go to the successor designated beneficiary or estate
The process depends on whether the deceased received Medicaid benefits during their lifetime, whether the state pursues a claim, and how much remains in the account after expenses and payback.
2. Understanding the Medicaid Payback Requirement
One of the most important things to know about ABLE accounts is the Medicaid payback provision under Section 529A(f). Here's how it works:
If the beneficiary received Medicaid:
- The state can file a claim for reimbursement of Medicaid benefits paid after the ABLE account was established
- This claim is paid from remaining account funds before any transfer to beneficiaries
- The payback is limited to what's actually in the account
- Some states have policies not to pursue these claims
Important: The Medicaid payback only applies to benefits received after the ABLE account was opened. Medical expenses paid before the account was established cannot be claimed. Additionally, any premiums the beneficiary paid into a Medicaid Buy-In program are deducted from the payback amount.
What this means for families:
- States have the legal right to recover some or all remaining ABLE funds
- The claim is filed against the account, not the broader estate
- Different states have different policies on whether they actively pursue these claims
- Some states have chosen not to enforce Medicaid payback for ABLE accounts—check your state's current policy
3. What Gets Paid First?
Federal law establishes a clear priority order for ABLE account funds upon death:
First: Qualified disability expenses incurred before death
- Outstanding medical bills
- Unpaid caregiving services
- Other disability-related expenses
- Funeral and burial expenses (these are considered qualified disability expenses)
Second: Medicaid payback (if applicable)
- Only if the state files a claim
- Limited to Medicaid benefits paid after the ABLE account was opened
- Reduced by any Medicaid Buy-In premiums paid
Third: Remaining funds distributed
- To successor designated beneficiary (if named), or
- To the deceased beneficiary's estate
Important: Paying funeral expenses from the ABLE account is allowed and reduces the amount potentially subject to Medicaid payback. Keep documentation of all expenses paid.
4. Naming a Successor Beneficiary
ABLE accounts allow you to name a successor designated beneficiary to receive remaining funds. However, it's critical to understand that naming a successor beneficiary does not avoid Medicaid payback—it simply determines who receives funds after payback is satisfied.
Successor beneficiary requirements:
- Must be an eligible individual (qualify for an ABLE account)
- Must be a member of the family of the original beneficiary (sibling, step-sibling, or half-sibling)
- Only one successor beneficiary can be designated per account
What happens with a successor beneficiary:
- Outstanding qualified disability expenses are paid first
- Medicaid payback is satisfied (if the state files a claim)
- Remaining funds transfer to the successor's ABLE account
- Funds continue to be used for the new beneficiary's disability-related expenses
- No gift tax or generation-skipping transfer tax applies to this transfer
If no successor beneficiary is named:
- After expenses and Medicaid payback, funds go to the estate
- Remaining funds are distributed according to the will or state law
- Funds become part of heirs' taxable assets
5. State-by-State Differences
Medicaid payback rules and enforcement vary significantly by state:
- Some states actively pursue ABLE account claims
- Others have policies not to file claims against ABLE accounts
- A few states have passed laws limiting or eliminating payback from ABLE accounts
- Your state's policy may differ from the state where the ABLE account is held
Important: State policies can change, so check current rules periodically. The ABLE National Resource Center maintains information on state Medicaid payback policies in their plan comparison tools. If the beneficiary received Medicaid in multiple states, each state may have the right to file a claim.
6. Planning Ahead to Maximize Benefits
Smart planning can help ensure ABLE funds benefit your loved ones:
Use funds appropriately during lifetime:
- Don't let funds accumulate unnecessarily if Medicaid payback is a concern
- Use funds for qualified disability expenses that improve quality of life
- Balance saving for the future with current needs
Consider naming a successor beneficiary:
- If another family member qualifies for ABLE, name them as successor
- While this doesn't avoid Medicaid payback, it ensures remaining funds continue to benefit someone with a disability
- Funds transferred to a successor's ABLE account maintain their tax-advantaged status
Prepay final expenses:
- Prepaid funeral plans are a qualified disability expense
- Paying these costs reduces the account balance before Medicaid claims
- Provides peace of mind for families
Check your state's Medicaid payback policy:
- Some states don't pursue ABLE account claims
- Consider opening an account in a state with favorable policies (most ABLE programs accept out-of-state residents)
- Remember that the state where Medicaid was received may still file a claim
Document everything:
- Keep records of all qualified expenses
- Outstanding bills can be paid before Medicaid claims are processed
- Good documentation speeds up the settlement process
7. How Purple Helps With ABLE Account Management
Purple helps families stay organized and prepared:
- Tracking qualified expenses so you can maximize appropriate spending
- Maintaining records of all transactions for documentation
- Monitoring balances to help with planning decisions
- Categorizing spending to demonstrate qualified disability expenses
- Providing clear reports that can help during account settlement
With organized records and clear documentation, families are better prepared to handle ABLE account closure when the time comes.