ABLE accounts and special needs trusts are both tax-free accounts intended to save money for disabled people while protecting their public benefits eligibility. Each has its merits, and it’s possible to maintain both account types.
Special needs trust (SNT)
There are various special needs trust types, including the following:
- Supplemental Needs Trust (third-party)
- Self-Settled Special Needs Trust (first-party)
- Pooled Special Needs Trust
In all SNT types, the beneficiary doesn’t own the trust’s assets, so they remain eligible for public benefit programs.
Supplemental Needs Trust
A third-party SNT (supplemental needs trust) allows a person who is chronically ill, physically or mentally disabled, to receive income without jeopardizing that person’s public assistance disability benefits. These benefits include Social Security, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), or Medicaid.
The grantor is an entity or individual that establishes and funds the trust. A grantor may act as or appoint a trustee to manage assets and oversee the disbursement of the trust’s assets to the beneficiary providing them with additional financial support. Although public assistance programs like Medicaid and Social Security have qualifying income and asset restrictions, assets in a special needs trust don’t count toward these eligibility requirements.
Typical funding comes in the form of gifts, inheritance from family, and proceeds of life insurance policies. Unlike a self-settled (first-party) SNT, there is no provision to pay back Medicaid upon the trust’s termination. Instead, the trust grantor decides the distribution of trust assets when the beneficiary dies. A third-party trust offers more flexibility and advantages than a self-settled trust.
In a self-settled trust, funding comes from assets, income, or lawsuit settlements belonging to the individual with the disability who is also the trust’s beneficiary. To ensure assets won’t be counted for Medicaid or SSI purposes, the beneficiary must meet the following federal requirements:
- Under 65 when creating and funding the trust
- The trust is irrevocable, meaning no modifications, amendments, or termination of the trust is permissible
- Reimbursement to Medicaid would occur on the beneficiary’s death if they were a Medicaid recipient during their lifetime
A first-party trust often requires court intervention to establish, and a trustee is named to make discretionary distributions on the beneficiary’s behalf. If the trust beneficiary controls the self-settled trust, its money would be a countable asset and not exempt from maintaining eligibility for public benefits.
Pooled Special Needs Trust
A pooled special needs trust consists of many sub-accounts whose aggregate funds allow for increased investment potential to benefit those who comprise the trust. This trust type is particularly useful for individuals or families with smaller funding amounts.
The administration is usually via a non-profit agency that provides the pooled trust master document and joinder agreements to families and their attorneys at no cost, negating the expense of hiring an attorney to write a trust document. A beneficiary of a pooled trust may establish their own sub-account.
All special needs trust types provide life-enhancing financial distributions for essentials such as:
- Therapies that are additional or not covered
- Medical, dental, and eye services
- Wheelchairs, hearing aids, and other adaptive equipment
- Internet and cell phone services
- Electronic equipment
- Personal travel
- Case management services
An Achieving a Better Life Experience (ABLE) account offers tax-advantaged savings to persons with significant disabilities if diagnosed before age 26. The beneficiary, family members, and friends may contribute to the ABLE account, but contributions must not exceed the gift tax exemption, which for 2023 is $17,000 per person. Although contributions are not intended to be tax deductible, some states may permit deductions against state income taxes.
ABLE accounts began in 2014 to help people with disabilities maintain their public benefits like Medicaid and SSI since the funds in the account, for the most part, do not count towards an individual’s eligibility for these benefits. The account beneficiary is the owner, and any income earned by the account is non-taxable. There is only one ABLE account allowed per eligible individual.
An ABLE account is subject to the same tax code governing education-related 529 savings accounts. Each state sets limits for total permissible ABLE savings, ranging from $235,000 to $550,000. The Internal Revenue Service (IRS) provides further information regarding contribution limits, rollovers, and more.
An ABLE account owner who works but doesn’t participate in an employer-sponsored retirement account can make an additional contribution up to the lesser of the ABLE account owner’s compensation for the tax year. Or secondarily to the poverty line amount as defined by program eligibility standards of the US Department of Health & Human Services (HHS).
If you face the onset of a disability before turning 26 and receive SSI or SSDI, you are automatically eligible to establish an ABLE account. If not a recipient of these benefits, you may still qualify if you meet Social Security’s criteria and definition regarding your functional limitations and have a letter of disability certification from the following:
- Licensed physician
- Doctor of medicine or osteopathy
- Doctor of dental medicine or dental surgery
And for some purposes:
- Doctor of optometry
- Doctor of podiatric medicine
An ABLE account owner may spend account money on qualified disability expenses. These expenses can include the following:
- Employment training and support
- Personal support devices
- Assistive technology
- Financial management and administrative services
- Health care expenses
- Other expenses that improve health, independence, or quality of life
Which is Better, an SNT or an ABLE Account?
Whether an SNT or an ABLE account is better for a person with a disability depends on their individual circumstances and needs. Both types of accounts can provide extra care and expenses for someone with a disability but have different benefits and limitations.
A special needs trust can be a good option for a person with significant assets or expecting a considerable inheritance or settlement. An SNT can receive funding via a wide range of assets, such as money from a personal injury settlement or an insurance policy, and can be used to pay for various expenses related to the individual’s disability. Additionally, an SNT can hold and manage assets without affecting the beneficiary’s eligibility for government benefits like Medicaid and SSI.
On the other hand, an ABLE account can be a good option for someone with limited assets and income or who wants more control over their funds. ABLE accounts are similar to a 529 college savings plan and can pay for various expenses related to the individual’s disability, such as education, housing, and transportation. Contributions to an ABLE account are limited, and there are restrictions on the balance that accrues in the account. Still, they don’t affect the beneficiary’s eligibility for government benefits, much like an SNT.
Both special needs trusts and ABLE accounts are good ways to provide for the extra care of a person with a disability, but there are key differences in terms of how they are funded and administered. A special needs trust’s funding can use a wider range of assets, while ABLE accounts have limits on annual contributions. Additionally, ABLE account funds are considered an asset of the beneficiary, whereas trust funds are not.
The ABLE National Resource Center offers an online chart to compare these account types and their offerings. You can even have both account types, each complementing the function of the other. However, it is important to consult with a special needs attorney to understand which option(s) is best for your situation. Your special needs lawyer can help you weigh the pros and cons of each account type and help you make an informed decision that considers your unique needs and circumstances.
We hope you found this article helpful. Please contact our office today at (559) 435-0455 and schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.