For some individuals with disabilities, the costs of support and care can cost tens of thousands of dollars annually, making government assistance essential. However, if their assets are not adequately sheltered, they could be disqualified from programs such as Supplemental Security Income (SSI) and Medicaid.
That’s where special needs trusts and ABLE accounts come in. But which should you use? Or should you use both?
How Special Needs Trusts Work
Special needs trusts (SNTs) can be set up in two ways:
1) As a third-party trust funded with assets other than those of the individual, such as the parents. The assets are held by the trust exclusively for the child. When the parents die, the assets become available for other children.
2) A first-party trust is funded with the individual’s assets to shelter earned or inherited income, keeping it from exceeding Medicaid and asset limits. When the individual dies, Medicaid can claim the remaining assets.
SNT assets cannot be used for expenses covered by government programs such as food (covered by Supplemental Nutrition Assistance Program), medical expenses (covered by Medicaid), and housing (covered by SSI).
Any expenses not covered by government programs can be paid out of an ABLE account.
How ABLE Accounts Work
ABLE accounts are tax-favored savings accounts that can be used to cover qualified disability expenses that support the individual in “maintaining or improving their health, independence, and quality of life.” These can include education, training, support services, computer and communications technology, and basic housing expenses.
ABLE accounts are offered through many states, much like 529 college savings plans. Depending on the state, accountholders can allocate their funds to a savings plan or a menu of investments. The account operates like a checking account and may include a debit card. Up to $17,000 may be contributed to the account each year as of calendar year 2023.
Like an SNT, any funds remaining in an ABLE account after the accountholder’s death may be claimed by Medicaid.
Key Differences Between ABLE Accounts and SNTs
Both SNTs and ABLE accounts can be used to help individuals with disabilities qualify financially for government benefits, but there are several differences between the two.
Individual Control: ABLE accounts are established and controlled by the individual. Even if others contribute funds, the individual can control how the funds are used.
With an SNT, a trustee makes decisions on how funds are spent.
Funding Limits: The yearly contributions to an ABLE account are capped at $17,000 for 2023. Each state determines the maximum amount of funds that can be held in ABLE accounts. For example, Florida caps the amount at $418,000. In most states, accounts with more than $100,000 may begin to affect SSI.
There are no contribution limits or account caps for SNTs.
How Funds Can Be Spent:
The funds from an ABLE account must be spent on qualified disability expenses, including:
- education
- housing
- transportation
- employment training and support
- assistive technology and personal support services
- health, prevention, and wellness
- financial management and administrative services
- legal fees
Funds from an SNT do not have to be spent on disability expenses and can be used for the individual’s benefit.
State Payback
The state can claim funds remaining in an ABLE account or SNT after they terminate for reimbursement of medical costs paid on behalf of the individual. With ABLE accounts, the state may only claim funds spent from the date the account was established. However, with an SNT, the state may claim all funds spent on the individual.
ABLE Accounts and SNTs are Complementary Planning Tools
The differences between ABLE Accounts and SNTs create advantages that make them complementary tools. In other words, both can be used in concert to create the optimum source of funds for individuals with disabilities.
ABLE accounts are excellent tools for managing funds, but they are limited in how much can be contributed. With the annual contribution limit and cap on how much can be held in an ABLE account, it would not be able to receive significant inheritances left by parents.
SNTs are better receptacles for inheritances or larger contributions. When used in concert with an ABLE account, a trustee can draw down funds from an SNT to contribute to an ABLE account to cover an individual’s expenses.
For many individuals with disabilities, a combination of an ABLE Account and SNT can provide the greatest control and flexibility while maintaining maximum access to government assistance. However, with the different rules and requirements governing each, it can be a somewhat complex arrangement requiring the guidance of a financial professional experienced in working with individuals with disabilities.
Resources:
ABLE National Resource Center – https://www.ablenrc.org/state-review/florida/
ABLE United Florida – https://www.ableunited.com/learn/