For families with a disabled child, financial planning can be a challenge, because loved ones don’t want to jeopardize the child’s eligibility for means-tested government benefits, especially after family members are no longer around to provide for the child. This article examines the benefits and drawbacks for two of the solutions to this problem: ABLE accounts and special needs trusts.
ABLE accounts vs. special needs trusts
For families with disabled children, financial planning can be a challenge. On the one hand, you want to provide the happiest, most comfortable life possible for your loved one. On the other hand, you don’t want to jeopardize your child’s eligibility for means-tested government benefits, such as Medicaid or Supplemental Security Income (SSI), especially after you’re no longer around to provide for him or her.
For many years, the most effective solution to this problem has been to set up a special needs trust (SNT), which provides resources for the care of a disabled child while preserving his or her eligibility for government benefits. SNTs also offer some asset protection against creditors’ claims.
Many families now have another option: In 2014, the Achieving a Better Life Experience (ABLE) Act was signed into Federal law. The act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings accounts.
“ABLE accounts and SNTs have different sets of advantages and disadvantages,
so it’s important to compare the two options carefully.”
The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.
The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.
An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.
Here’s a quick review of the relative advantages and disadvantages of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must become blind or disabled before age 26. There’s no age limit for SNTs.
Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.
Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.
Contribution limits. Annual contributions to ABLE accounts currently are limited to $14,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions in excess of $14,000 per year may be subject to gift tax.
Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.
Medicaid reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There’s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the account or the SNT.
ABLE accounts offer tax advantages and are less expensive to administer. SNTs offer higher contribution limits and greater flexibility. We can help you determine which is best for your family: an ABLE account, an SNT, or one of each.