Article Overview
This article will lay out the differences between a special needs trust and ABLE Accounts to assist in the decision-making process of which is a better fit for your situation. ABLE Accounts are planning tools that allow an individual with disabilities a tax-free savings option. ABLE Accounts are similar to a 529 plan but allows the individual to maintain eligibility for means-tested government benefits. Special needs trusts are set up for a person with disabilities to supplement and maintain eligibility for means-tested government benefits. Even though both sound similar, there are differences that will be explained down below.
General: Special Needs Trusts and ABLE Accounts
A. Special Needs Trust
A special needs trust is a living breathing legal entity that is approved by Medicaid. The special needs trust provides a legal relationship between a beneficiary and a trustee. The beneficiary is a person with a disability that would be disqualified from means-tested government benefits if the trust did not exist. This is because a means-tested government benefits measure a person’s income and assets, so if a person with a disability were to receive a certain monthly income or have a certain amount of countable assets the person could be disqualified. The main reasons we see special needs trusts are for Medicaid and Supplemental Security Income (SSI). In addition, a special needs trust is a strategy for those who want to provide for someone without taking the risk that the person will be disqualified from benefits.
A special needs trust can cover a portion of an individual’s income that does not come from government benefits. Assets are held in the trust and distributed via the trustee at their discretion. It is important to speak to an attorney and financial advisor prior to deciding what your best option is.
B. ABLE Accounts
An ABLE Account is a tax-advantaged savings Account available to individuals who were diagnosed with a disability prior to 26 years old. Contributions can be made to the Account by the beneficiary, friends, or family member. However, the total annual contributions cannot exceed $15,000 as outlined below. ABLE Accounts were created by the 2014 Achieving a Better Life Experience Act (ABLE) to assist in helping a person with maintaining their means-tested government benefits. As stated above, ABLE Accounts are similar to 529 plans, which means it is established by your particular state.
Colorado allows for ABLE Accounts, but Hawaii, Idaho, Maine, North Dakota, South Dakota, Utah, and Wyoming do not. As defined below, ABLE Accounts have an upper limit on the amount that can be deposited at $100,000. If the amount in the Account goes above $100,000 it could disqualify the individual from means-tested government benefits. As with a special needs trust it is important to consult an attorney and financial advisor prior to planning.
Differences between Special Needs Trusts and ABLE Accounts
A. Eligibility
An ABLE Account limits eligibility to an individual who disability onset occurred prior to the age of 26 and the individual must satisfy Social Security’s criteria regarding functional limitations stemming from the disability. A special needs trust is funded with assets belonging to the beneficiary or other individual and must be established before an individual reaches the age of 65. In addition, for a special needs trust, this person must satisfy Social Security’s criteria regarding functional limitations stemming from the disability.
B. Management
An ABLE Account can be created and managed by the beneficiary if the individual has capacity. If the individual needs assistance the Account can be created and managed by their parents, power of attorney, conservator, or guardian. Special needs trusts may be established by the beneficiary but are more commonly established by parents or grandparents. A third-party trustee must manage the special needs trust if it is established by the beneficiary. That person would be responsible for distributing funds based on the trust language.
C. Contributions
Any amount over $100,000 in an ABLE Account will count toward the individuals $2,000 resource limit for Social Security Income or Medicaid, which could cause the individual’s payments to be suspended until the Account drops below $100,000. Total lifetime contributions are tied to 529 plans, which in Colorado is a maximum of $400,000. In addition, the yearly deposits in the Account cannot exceed the federal gift tax limit of $15,000 (in 2021). Special needs trusts do not limit how much the trust may hold.
D. Use of Funds
An ABLE Account may pay for the beneficiaries qualified disability expenses or to improve the health independence, or quality of life for the beneficiary. Qualified disability expenses include any expense related to the Account owner’s disability that assists them in increasing and/or maintaining their health, independence and/or quality of life. These may include expenses related to education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other disability-related expenses that the ABLE Account owner might incur as a result of having a disability. A special needs trust can use the funds at the trustee’s discretion to pay for anything that benefits the beneficiary alone aside from food, housing, and other small exceptions outlined in the letter approving the trust sent from Medicaid.
E. Fees
ABLE Account fees are generally limited to maintenance and charges by the financial institution. Special need trusts fees are limited to formation by an Attorney and the trustee’s ability to take a reasonably hourly rate to administer the trust.
Conclusion: Choosing Between a Special Needs Trust and ABLE Account
Before deciding between the two it is important to meet with an attorney and a financial advisor, so they can provide you with guidance on the situation. However, some main concerns that we see are that an ABLE Account is not ideal if you want a third party to fund the Account or if you want the third party to be in charge of the funds. Special needs trust tend to be more comprehensive, but an ABLE Account could be used as a helpful secondary tool. There are also other benefits for both ABLE Accounts and Special needs trust but will vary on a case-by-case basis.
If you would like to speak to an attorney concerning a special needs trust please do not hesitate to give us a call at (720) 513-2299 or click here to schedule a free initial consultation.
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