Understanding ABLE Accounts and Special Needs Trusts

If you are caring for a loved one with special needs, you have probably heard about a new way to set aside money for his or her future without losing access to federal benefits by using an ABLE Account. ABLE is short for Achieving a Better Life Experience, and the long-anticipated ABLE Accounts are the result of the ABLE Act which was passed by Congress in 2014.

In very broad terms, ABLE Accounts are similar to certain types of Special Needs Trusts (SNTs). They both aim to allow an individual with special needs to save money in a tax-free environment and remain qualified for government benefits from Social Security and Medicaid.

Here are some of the differences between an ABLE Account and a SNT which you should keep in mind as you prepare your child for an independent financial future.

AGE AT THE TIME OF DISABILITY. With an ABLE Account the individual must have become blind or disabled before the age of 26. A SNT can be established regardless of when an individual became disabled.

COST TO ESTABLISH THE TRUST. It is relatively easy and inexpensive to set up an ABLE Account, and there is no minimum initial deposit required. Setting up a SNT is more expensive and complicated, in part because there are several types of SNTs.  (See box.)

SOURCE OF FUNDING. In both cases, anyone can contribute money to the trust/account. With certain SNTs the beneficiary can have his or her salary deposited into the trust. However, a trust can be funded with property, stocks or other assets, but the ABLE Account is essentially a savings account with a cap.

TAX-FREE INCOME: The investment income earned on ABLE Accounts is not taxed; withdrawals are also tax fee as long they are used for the individual’s qualified expenses related to the disability such as health, education, housing, transportation, training, assistive technology, personal support, related activities and expenses. The tax status of investment income and withdrawals from SNTs vary by the type of SNT and how the funds are used, which is why it is important to work with a qualified attorney when you set up a trust for your loved one.

TRUST INCOME LIMITS. Only $14,000 can be put into to an ABLE Account each year. While this limit may seem reasonable today, it prevents you from leaving your child a large lump-sum of money when you die. ABLE Accounts also have an over-time limit which is the same as the state limit for education-related 529 savings accounts ($350,000 in Delaware). But, for individuals receiving SSI, only the first $100,000 is exempt from the SSI individual resource limit. If the trust exceeds the $100,000, the beneficiary will lose any SSI support until the amount of money in the trust drops below the limit and notification is made. (Medicaid benefits are not affected by the amount in the account.)
There are no contribution limits for SNTs. If the individual receives a legal settlement, a gift from an estate, or regular contributions from grandparents or others the funds can be deposited in the SNT tax-free.

LIMITS ON WHAT THE FUNDS ARE USED FOR:  Withdrawals from an ABLE Account are tax free if the funds are used to pay for “qualified disability expenses” listed above. Certain SNTs have greater flexibility on what the money can pay for and SNT funds are not available to creditors or for paying judgments.

PAYBACK PROVISION. The ABLE Act has a Medicaid payback provision so that when the beneficiary dies, the government can request that any funds remaining in the ABLE Account be used to pay back the benefits your loved one received. Medicaid is repaid before other family members inherit whatever funds remain in the trust so the entire account may be depleted. While some types of SNTs include a payback requirement, it is possible to set up a SNT so there is no payback; funds remaining in the SNT can be distributed to loved ones when the beneficiary dies.

REPORTING REQUIREMENTS.  With an ABLE Account, an electronic statement showing what was spent from the account and the account balance must be sent to the Social Security Administration every month. These types of statements are not required with a SNT.

INDEPENDENCE. A SNT requires that a trustee be appointed to manage the trust, so the beneficiary must ‘request’ funds from the trustee. If an individual with special needs is not able to manage her/her finances, the peace of mind that comes with a trust administrator is welcome for aging parents. However, the trustee can deny funds to the beneficiary which could prove frustrating to your child from time to time. With an ABLE Account, the person with the special needs can manage the account – the value of this independence is hard to measure.

DO YOU NEED A TRUST AT ALL? With the Affordable Care Act’s prohibition on denying coverage to individuals with pre-existing conditions and Pre-Existing Condition Insurance Programs (PCIP), Medicaid may no longer be the coverage of choice for people with disabilities. So SNTs which are designed solely as a way to maintain eligibility for Medicaid or SSI may not be necessary. Obviously as long as Congress debates repeal/replace/repair of the Affordable Care Act, this issue remains in limbo.

Helping a child with special needs prepare to live independently can be joyful as well as challenging. Financial issues are particularly worrisome and sometimes the choices are confusing. This blog is intended to give you highlights of what you should know about ABLE Accounts and Special Needs Trusts, but it is important that you seek help from a professional as you consider your options. If used alone or incorrectly the ABLE Act can be devastating to your loved one. A poorly designed SNT can actually result in the beneficiary being disqualified for benefits.

A qualified professional can help you avoid the pitfalls of both types of accounts and can help you create a comprehensive, multi-generational plan which should help you put some of your worries about your child’s future to rest.

First-party vs third-party SNT

There are two types of Special Needs Trusts (SNTs). A first-party SNT is created by the person with the disability with his/her money. A third-party SNT is not created by the person with the disability and it is not funded with his/her money – which makes it very flexible. Importantly, the government has no claim against third-party SNTs since the assets are never the beneficiary’s assets. In addition, the money in a third-party SNT can be passed on to surviving loved ones or charities, for example, when the beneficiary dies.

Third-party SNTs are frequently created by parents and/or grandparents of a child who is disabled. They can be designed so the disabled beneficiary may have a great deal of control over the SNT.

Third-party SNTs are better than ABLE Accounts for most purposes.