What’s the Difference Between an Able Account and a Special Needs Trust?

If you have a child, grandchild, or other loved one with special needs, you may be concerned about their financial well-being when you are no longer around to help provide for them. They may not be able to manage their own finances, so you may be worried about who will handle that for them. They may need to qualify for government benefits, so whatever assets they have will need to be held in such a way that they don’t jeopardize benefits.

Fortunately, you have multiple options for protecting your loved one and preserving their resources. You could create a special needs trust, an ABLE account, or both. What is the difference between an ABLE account and a special needs trust, and which is better for your loved one’s needs?

Understanding ABLE Accounts

If you are not familiar with ABLE accounts, that may be because they are relatively new on the planning scene. These accounts offer people with disabilities a tax-free savings option that will not interfere with their eligibility for means-tested government assistance like Medicaid and Supplemental Security Income (SSI).

Similar in nature to a 529 College Savings Plans, total contribution to an ABLE account are tied to the provider state’s limit on total contributions to a 529 Plan. Total annual contributions are tied to the federal gift tax exclusion amount ($15,000 for 2020). Each individual may have only one ABLE account, and if account assets exceed $100,000, the excess counts toward the allowable $2,000 resource limit for SSI eligibility. SSI payments will be suspended until the account balance is under $100,000. (If the beneficiary receives SSI-linked Medicaid, those benefits will not be interrupted.)

An ABLE account can be established and managed by the disabled person if they have the capacity to do so. If they do not, a parent, conservator or guardian, or agent under a power of attorney may establish and manage the account. ABLE programs are managed at the state level, and each state’s program establishes investment options to which account holders have access.

What can ABLE account funds be used for? They are available for the beneficiary’s “qualified disability expenses.” These expenses include basic living expenses, health care expenses, housing, transportation, education, employment training and support, personal support services, assistive technology, financial management, and administrative services.

While assets in an ABLE account grow income-tax free, this may offer negligible benefit; most people who receive government benefits pay little or no income tax anyway.

While assets in an ABLE account grow income-tax free, this may offer negligible benefit; most people who receive government benefits pay little or no income tax anyway. And contributions to the account are not income tax deductible under federal law, although they may be under state law.

If an ABLE account beneficiary receives Medicaid benefits, and dies with assets in the ABLE account, the state Medicaid agency may claim reimbursement against the assets in the account, even if those assets were contributions by third parties.

Comparison with Special Needs Trusts

Like an ABLE account, a special needs trust (SNT) may be established by the beneficiary, parent or grandparent, conservator or guardian, or agent under a power of attorney. Such trusts are called first-party special needs trusts. A third- party special needs trust may be established by anyone other that the beneficiary.

Unlike ABLE accounts, one individual can be a beneficiary of multiple SNTs, and there are no limits on the assets each can hold. The trustee may spend the funds for anything, other than housing or food, that benefits only the beneficiary. Such disbursements will not jeopardize the beneficiary’s government benefits. For SSI recipients, disbursements from the trust for food and housing are considered “in kind” support, which will result in a reduction in SSI payments (which may still be beneficial depending upon the beneficiary’s circumstances).

As with ABLE accounts, funds in a first-party SNT are vulnerable to a claim for Medicaid reimbursement on the beneficiary’s death; those in a third-party SNT, however, are not.

In light of all these considerations, should you choose an ABLE account or a special needs trust for your disabled loved one? The answer depends on the circumstances, but in general, most planners consider an ABLE account a helpful supplement to, rather than a substitute for, a special needs trust. ABLE Accounts are particularly helpful if a beneficiary has received a small litigation settlement, a windfall like a small lottery win, or an inheritance of $15,000 or less directly from a relative that might otherwise jeopardize benefits.

If you have questions about setting up an ABLE account or SNT to benefit a loved one, we invite you to contact our law office to schedule a consultation.