Special Needs Trusts vs ABLE Accounts: How Do You Choose

As a parent of a child with special needs, I am acutely aware of planning long-term for my child. Taking advantage of trusts and tax-advantaged accounts goes a long way in providing financial stability and peace of mind.

Special needs trusts (SNTs) and ABLE accounts are legal tools that allow people with disabilities to set aside money for their needs without losing their eligibility for public benefits such as Medicaid (Medi-Cal in CA) and Supplemental Security Income (SSI).

But how do they work, and what are the differences between them?

This article provides an overview of SNTs and ABLE accounts, compares and contrasts their main features and benefits, and offers some tips and recommendations on choosing the best option for your situation and goals.

Special Needs Trust vs. ABLE Account: An Overview

	Able Accounts		Special Needs Trust
			First Party	Third Party	Pooled Trust
Created by	The eligible individual or a parent, guardian, or agent under power of attorney		The individual, a parent, grandparent, legal guardian, or court	Anyone other than the individual with the disability	Usually established and administered by nonprofits for multiple beneficiaries. The individual, a parent, grandparent, legal guardian, or court (first-party pooled trust) and anyone other than the disbled individual (for third-party pooled trust)
Funded By	The eligible individual or any other person		The disabled individual	any other person ecept the individual with the disability	The disabled individual (for first-party). Any other person aside the individual with the disability (for third-party)
Eligibility	The individual must have a disability that began before age 26 and meet the criteria for SSI or SSDI, or have a certification from a physician		The individual must have a disability that meets the criteria for SSI or SSDI, or be under 65 years old and disabled according to state law
Decision Making	The eligible individual or an authorized person		A trustee appointed by the creator of the trust or the court
Number of Accounts	One per eligible individual		No limit
Costs	Vary by state, but may include enrollment fee, annual fee, monthly fee, and investment fees		Vary by type of trust, but may include legal fees, trustee fees, and administrative fees
Taxation	Earnings are tax-free if used for qualified disability expenses		Earnings are taxable in the year income is received, but may be offset by deductions for beneficiary’s expenses. First party trusts may be taxed as trust income (higher tax brackets), while third-party trusts are taxed as personal income
Contribution Limits	$18,000 per year from all sources in 2024, plus (potentially) additional income from employment up to the poverty level		No limit
Balance Limits	$100,000 for SSI eligibility, plus the state’s limit for 529 plans		No limit
How can funds be used?	For qualified disability expenses, such as education, housing, transportation, health, assistive technology, etc.		For supplemental needs that are not covered by public benefits, such as personal care, entertainment, travel, etc. (unless you want to impact public benefits)
What happens upon death	The state may claim reimbursement for Medicaid expenses from the account balance, unless transferred to another eligible individual		Depends on the type of trust: first-party trusts must reimburse the state for Medicaid expenses, third-party trusts can distribute the remaining funds to other beneficiaries, pooled trusts can retain a portion of the funds for charitable purposes

People with disabilities often face challenges that could limit the ability to save funds and achieve their goals, whether it's additional medical expenses or the struggle to preserve access to governmental benefits. However, two saving strategies can help overcome these barriers to secure their future and limit financial strains: Special needs trusts (SNTs) and ABLE accounts.

Special Needs Trusts explained

A Special Needs Trust (SNT) offers a way to save money for the recipient (a designated beneficiary) while preserving eligibility for needs-based government benefits. It functions as a safety net for the designated beneficiary, often someone with a disability.

Let's back up a little and discuss what a trust is.

When I was growing up, a trust fund baby was a bit of a derogatory term for someone born with a silver spoon. But trusts aren't just meant to fund someone's rich lifestyle.

A trust is a legal arrangement where a person or an institution, known as the trustee, manages and holds assets for a designated beneficiary with a fiduciary level of responsibility. That means the trustee needs to operate with the beneficiary's best interests at heart.

Using a special needs trust, money can be saved to pay for disability-related expenses.

The best part?

The money in this trust doesn't count towards income and asset limits for public benefits like Supplemental Security Income (SSI) and Medicaid eligibility. It's a way to support persons with disabilities financially without risking losing the assistance they're already getting.

Third-Party vs First-Party vs Pooled Trusts

There are two types of SNTs: third-party and first-party. A third-party SNT is set up and funded by someone other than the beneficiary, often a family member like a parent or relative. On the flip side, the account owner for a first-party SNT is the beneficiary, usually with money they received from a lawsuit, inheritance, employment, or some other source.

After the beneficiary's death, the leftover first-party SNT funds must be paid back to the state to cover Medicaid costs. The funds will come from the beneficiary's estate.

A third-party SNT, often referred to as a supplemental needs trust, comes with a few perks. For starters, there's no requirement to pay back any leftover funds, and you have more freedom in how you dish out whatever's left after the person with disabilities passes away. A third-party SNT gives you more flexibility with fewer strings attached.

Pooled trusts are usually administered by nonprofits but establish individual subaccounts for individuals. The assets are pooled for investment management.

Pros and cons of Special Needs Trusts

Pros

• SNTs give extra income and resources to people with disabilities, improving their quality of life and financial independence.
• It protects the beneficiary from losing government benefits, which have strict income and asset limits.
• Adaptable to suit the specific needs and preferences of people with disabilities and their family members.

Cons

• SNT setup can be complex to establish and maintain, often requiring a legal representative and trustee services.
• You'll pay legal fees to setup a special needs trust
• It may limit the control and access of people with disabilities to their own money, depending on the trust type and trustee's decisions.
• SNTs can have tax implications, particularly for third-party SNTs, which may face higher tax rates and capital gains taxes.

Achieving a Better Life Experience Account (ABLE) explained

Established by the Achieving a Better Life Experience Act, ABLE accounts are special savings accounts for people with disabilities who became disabled before turning 26. These accounts help them save money without losing access to important government benefits like SSI and Medicaid.

Why the need for this savings account?

With an ABLE account, beneficiaries can save more than the $2,000 individual SSI resource limit (asset limit). The money can be used for transportation, assistive technology, healthcare, and job support.

Money in an ABLE account grows without being taxed, and when the account owner takes it out to spend on qualified disability expenses, they don't have to pay taxes on it either.

ABLE accounts give the designated beneficiary control – they don't need anyone's permission to manage it or use the money for the things they need.

Pros and Cons of Achieving a better life experience (ABLE) Accounts

Pros

• ABLE accounts grow tax-free, similar to how 529s and ROTH IRAs accumulate growth. You contribute after-tax income and pay no tax on earnings and withdrawals.
• Funds can pay for qualified disability expenses (QDEs) like transportation, health care, and education.
• Individuals with disabilities can manage the account independently if capable, or they can enlist assistance.
• Setting up and using the account is straightforward and affordable. Various state programs offer ABLE accounts.
• Maintaining a balance below $100,000 and keeping annual account contributions under $18,000 (in 2024) allows the account owner to remain eligible for Medicaid and SSI.

Cons

• To qualify for an ABLE account, the individual must have become disabled before turning 26.
• Each individual can only have one ABLE account, and transferring to another state program is not straightforward.
• If the account balance exceeds $100,000, SSI benefits will be suspended until the balance falls below that threshold.
• Upon the account holder's death, the state may reclaim some or all of the funds to cover Medicaid services received during their lifetime. This process is known as payback to the state.

Main differences between ABLE accounts and special needs trust accounts:

ABLE accounts and special needs trusts are both methods to save money for individuals with disabilities while preserving the beneficiary's eligibility for government benefits. However, they have key differences worth looking into before selecting either or both options.

Account creation

Any eligible individual or a parent, guardian, or agent under power of attorney can open an ABLE account. For special needs trust accounts, the disabled individual, a parent, a grandparent, a legal guardian, or a court can create an account.

ABLE accounts are more accessible and flexible for people who want to open an account for themselves or their loved ones. Special needs trust accounts may need more legal involvement and documentation to establish.

Funding

ABLE accounts allow contributions from both the eligible individual and others. On the other hand, special needs trust accounts can be funded by the individual (first-party trust), another person (third party trust), or a non-profit organization (pooled trust). The type of trust might impact how taxes are handled and the rules for reimbursement from the account.

This means ABLE accounts can potentially have a wider range of contributors than special needs trust accounts, which have different types depending on where the funds come from.

Eligibility

ABLE accounts require the individual to have a disability that began before age 26, meet the criteria for SSI or SSDI, or have a certification from a physician. Compared to special needs trust accounts, ABLE accounts have a stricter age limit and a more straightforward eligibility verification process. First-party special needs trust accounts require the individual to have a disability that meets the criteria for SSI or SSDI and be under 65 years old when established. Third-party trusts, which are solely funded by anyone other than the designated beneficiary, have no age limits.

Decision making

ABLE accounts give more autonomy and control to the account holder or their representative, allowing them to make spending decisions. In contrast, special needs trust accounts delegate the authority and responsibility to a third party who must act in the beneficiary's best interest.

Number of accounts

ABLE accounts limit one account per eligible individual, while special needs trust accounts allow multiple accounts to be created for different purposes or beneficiaries.

Costs

ABLE account fees vary by state but may include enrollment, annual, monthly, and investment fees. Special needs trust account fees vary by type of trust, including legal, trustee, and administrative fees. ABLE accounts typically have lower and more predictable costs than special needs trust accounts. However, pooled SNTs managed by non-profit organizations are the most cost-effective option.

Taxation

ABLE accounts offer tax-free earnings if used for qualified expenses. Special needs trust accounts have taxable earnings but may be offset by deductions for supplemental needs, including personal care, entertainment, travel, etc.

Contribution limits

Funds contributed to an ABLE account from all sources cannot exceed $18,000 in 2024, except for additional income from the account owner's employment. Eligible employment income for contribution goes up to the federal poverty line amount, which is $14,580. (higher in Alaska and Hawaii) The other caveat is that the account owner is not paying into a retirement plan.

Contributors can keep in mind the annual gift tax exclusion, which is $18,000 per person in 2024. They don't have to pay gift tax as long as their gift stays below this amount.

Capping the account contributions to ABLE accounts affects its growth potential. Special needs trust accounts have no cap on how much money can be added to the account, which may allow for more savings and investments.

Balance limits

ABLE accounts have a balance limit of $100,000 for SSI eligibility.

Special needs trust accounts have no threshold on how much money can be saved in the account, providing more financial security and flexibility for the beneficiary.

Supplemental security income

The Social Security administration set up Supplemental Security Income (SSI) to provide basic income and health coverage for the beneficiary. Distributions from an SNT for similar basic needs like food and housing could reduce the SSI payment. You might need to consult a lawyer to determine whether you can pay for expenses that SSI is supposed to pay for, like housing, food, utilities, and shelter. In some cases you will accept the reduction in SSI payment to pay for better living standards.

In an ABLE account, you can pay for an expenses without impact on SSI as long as the holdings are under $100,000.

Qualified disability expenses: How can funds be used?

ABLE accounts have a potentially broader scope for use of funds, as long as they are qualified disability expenses. Qualified disability expenses can include disability-related expenses like education, food, housing, transportation, employment training, assistive technology, personal support services, health care expenses, financial management, and administrative services. They are meant to improve the quality of life.

Special needs trust accounts are meant to be supplemental and generally should not be related to basic living expenses. Distributions for expenses covered by public benefits, like food or housing, could result in a reduction of SSI.

What happens upon death?

When the beneficiary dies, ABLE accounts have a lower or zero inheritance for the beneficiary's heirs, depending on the state and the transfer option. ABLE accounts may be subject to state reimbursement for Medicaid expenses from the account balance (payback claim) unless transferred to another eligible individual.

Special needs trust accounts have different outcomes depending on the type of trust: first-party trusts must reimburse the state for Medicaid expenses, third-party trusts can distribute the remaining funds to other beneficiaries, and pooled trusts can retain a portion of the funds for charitable purposes.

Special needs trust accounts tend to have a higher or lower inheritance for the beneficiary's heirs, depending on the type of trust and the distribution plan.

Differences by State

ABLE accounts are special savings accounts for people with disabilities. However, the rules and benefits can vary depending on your state.

Firstly, some states only allow residents to open an ABLE account there, while others accept applications from people living out of state. For instance, Alabama's program is just for residents, but Alaska's is open to everyone in the U.S.

Secondly, some states give tax breaks for contributing to an ABLE account. This means you might get a deduction or credit on your state income tax. For example, Arkansas offers a tax deduction of up to $5,000 per taxpayer for contributions, but California doesn't give any state tax benefits for ABLE accounts.

Thirdly, there could be fees associated with maintaining your ABLE account. In Georgia, for instance, there's a $27 annual fee, but in Florida, there are no fees.

Lastly, the investment options can differ. Some states offer more choices for investing your money, while others offer fewer. California, for example, provides eight investment options, whereas Maryland offers four.

You can compare these features and more using the comparison tool on the ABLE National Resource Center website to find the best fit for you.

SNT vs. ABLE Account: Which Is Better?

If the beneficiary gets a big sum of money, like from an inheritance or a lawsuit settlement, they might want to protect it with an SNT. An Able account may not be able to accommodate such a large amount due to the contribution and account limits.

An ABLE account is ideal if the beneficiary prefers more flexibility and control over the account. With an ABLE account, they can access their funds directly and use them for things related to their disability. An SNT requires the trustee's approval for every transaction.

However, if the beneficiary wants to save for things like education, housing, or retirement, they might find both an SNT and an ABLE account helpful. An SNT gives them long-term financial security, while an ABLE account offers tax benefits and easier access to their money. Using both together can help them save more and cover different expenses.

Special Needs Trusts vs ABLE Accounts: Choosing wisely for your designated beneficiary

Deciding between a Special Needs Trust (SNT) and an ABLE account depends on where your money comes from, how much control you want, and what expenses related to the beneficiary you need to cover. If you have a lot of money and want long-term security, an SNT might be the right choice. On the other hand, if you prefer flexibility and tax benefits, an ABLE account could be the way to go. Sometimes, combining both can give you the best of both worlds. To determine what's best for you, consider your needs and goals carefully.

FAQs

Does Autism Qualify for an ABLE Account?

Yes, having autism can qualify someone for an ABLE account. Eligibility for an ABLE account is based on meeting specific criteria related to the onset of disability before age 26.

Can I Have an SNT and an ABLE Account?

Yes, it is possible to have both a Special Needs Trust (SNT) and an ABLE account. These two types of accounts serve different purposes and can complement each other in planning for the financial future of individuals with disabilities.