ABLE Accounts or Special Needs Trusts – Which One is Right for You?
While all parents want to take care of their children, parents of children with disabilities face unique challenges, including protecting eligibility for government benefits such as supplemental security income (SSI) and Medicaid. The income limit for an individual SSI recipient is $2,000 per month. Resource limits to qualify for Medicaid are usually at or below the federal poverty level.
Two tools used to allow an individual to maintain eligibility are ABLE Accounts and Special Needs Trusts. A Special Needs Trust (sometimes referred to as a Supplemental Needs Trust) is a trust that allows families to transfer assets into the trust for the benefit of the individual with special needs. A special needs trust can be a 1st party special needs trust if created using the assets of the individual with disabilities or a 3rd party special needs trust if created using the assets of any other person. The Achieving a Better Life Experience (ABLE) Act of 2014 allowed for the creation of special accounts that would allow a person with disabilities to save money for qualifying disability related expenses. A special needs trust or an ABLE account can both be useful tools. But which one is right for you? Here is a comparison of some of the different requirements:
| ABLE Account | Special Needs Trust (SNT) | |
|---|---|---|
| Eligibility | Eligibility is limited to an individual whose disability occurred prior to the age of 26 and has significant functional limitations arising from the disability as established by Social Security. | 1st Party SNTs must be established prior to the individual with disabilities attaining age 65. There is no limit on when a 3rd Party SNT can be established. |
| Management | Can be created and managed by the individual with disabilities subject to capacity. It could also be managed by a parent, guardian/conservator, or agent under power of attorney. | A 1st Party SNT can be established by the individual, their parents, grandparents, guardian/conservator, or court. A 3rd Party SNT can be established by anyone except the individual with disabilities. Management of the SNT is by the designated trustee who should not be the individual with disabilities. |
| Contribution Limits | Annual contributions limited to the federal gift tax annual exclusion ($17,000 in 2023). Amounts in excess of $100,000 will count toward SSI and Medicaid resource limits. Total lifetime contributions are limited to the individual state's 529 College Savings Plan limitations. | No limit. |
| Investment Options | As determined by account provider. | Limited only by fiduciary duty owed by Trustee to beneficiary. |
| Use of Funds | Must be used on "qualified disability expenses." These expenses may include: - Education - Housing - Transportation - Employment training and support - Assistive technology and personal support services - Health, prevention and wellness - Financial management and administrative services - Legal fees - Expenses for oversight and monitoring, funeral, and burial expenses |
In accordance with the terms of the SNT and consistent with the requirements of SSI and Medicaid. |
| Fees and Costs | Nominal. Normally limited to the maintenance fees and charges of any financial institution. | Attorney fees and costs necessary to set up the SNT. |
| Taxes | Not deductible but grow free of federal income tax. Some states allow for deduction. | Taxable. |
| Medicaid Payback | Subject to the Medicaid payback requirement upon death. | 1st Party SNT assets are subject to the Medicaid payback requirement on death. 3rd Party SNT is not subject to the Medicaid payback requirement. |
With the above differences in mind, the answer as to which one is best is really a question of your individual situation. Often, the availability of both tools provides a winning combination. An ABLE account doesn’t work well to manage a large amount of 3rd party funds because of the caps as well as the Medicaid payback requirements. But an ABLE account may be just the answer to save unspent earnings in order to keep the individual below the resource limitations. It could also be a cost-effective option for dealing with a small inheritance or some other unexpected windfall. ABLE accounts also provided a better vehicle for dealing with housing expenses. These expenses, if paid by the SNT, could constitute in-kind support and reduce payments received from the program. The key thing to keep in mind if you use both is that ABLE account or 1st Party SNT funds should generally be used before funds from a 3rd Party SNT as the ABLE account and 1st Party SNT are subject to Medicaid payback requirements.
As always, seek competent help when deciding which planning tool is right for you.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.