The Weekly Scenario: ABLE Account vs. Special Needs Trust

Question: What is the difference between an ABLE account and a Special Needs Trust?

Answer: If you have a child, grandchild, or other loved one with special needs, you are likely concerned about their financial well-being particularly if you are no longer around to help provide 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 government benefits.

Understanding ABLE Accounts

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).

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.

An ABLE account can be established and managed by the disabled person if they have the capacity to do so. However, more commonly, a parent, conservator or guardian, or agent under a power of attorney establishes and manage the account.

ABLE account funds can be used for a 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.

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.

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 than 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, though you have to be careful when it comes to housing or food benefiting the beneficiary. Such disbursements will not jeopardize the beneficiary’s government benefits. For SSI recipients, however, disbursements from the trust for food and housing are considered “in kind” support, which may 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.