ABLE Account Vs. Special Needs Trust

What's the Difference?

If you have a loved one with special needs, you may be worried about their financial well-being when you are no longer around to provide for them. You may need to consider how they will manage their finances. Additionally, they may qualify for government benefits, so whatever assets they have will need to be held in such a way that doesn’t threaten benefits.

There are multiple options for protecting your loved one and preserving their resources. You could potentially create a special needs trust, an ABLE account, or both. In our blog, we discuss the difference between ABLE accounts and special needs trusts, and which method is best for your loved one’s needs.

ABLE accounts 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).

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.

ABLE account funds are available for the beneficiary’s “qualified disability expenses.” These expenses include basic living expenses, health care expenses, housing, transportation, education, employment training, 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 to Special Needs Trusts

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 payments will not jeopardize the beneficiary’s government benefits. For SSI recipients, payments 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.

Overall...

The choice between special needs trusts and ABLE accounts 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 an inheritance of $15,000 or less directly from a relative that might otherwise jeopardize benefits.

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