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Special Needs Trust vs ABLE Account - Understanding the Pros and Cons

A woman in a wheelchair is at a table signing papers with others gathered around her

As individuals with disabilities navigate their financial planning, two important options often arise, Special Needs Trusts (SNTs) and ABLE accounts. Both are possible tools for managing funds and maintaining eligibility for public benefits. However, it’s crucial to understand the critical differences between these two options to make informed decisions that align with specific needs and goals.

This comprehensive guide will explore the intricacies of Special Needs Trusts and ABLE accounts, comparing their features, benefits, and limitations. By the end, you will clearly understand how these tools work and which may be the most suitable for your circumstances.

1. Introduction

When planning for individuals with disabilities, Special Needs Trusts (SNTs) and ABLE accounts have revolutionized the landscape. These tools offer opportunities for individuals to maintain eligibility for critical public benefits while securing funds for long-term care, education, housing, and other disability-related expenses.

While SNTs and ABLE accounts serve similar purposes, they differ significantly in control, funding limits, qualified expenses, and payback requirements. Understanding these differences is essential for individuals and families who wish to make informed decisions that align with their circumstances and goals.

In the following sections, we will explore the details of Special Needs Trusts and ABLE accounts, exploring their features, benefits, and limitations. We will also consider the critical differences between these two options to assist you in choosing the most suitable option based on individual needs.

2. Special Needs Trusts: An Overview

2.1 Definition and Purpose

A Special Needs Trust, also known as a Supplemental Needs Trust, is a legal arrangement designed to protect the assets of an individual with disabilities while preserving their eligibility for means-tested public benefits, such as Supplemental Security Income (SSI) and Medicaid (in which the government measures a family’s income against the federal poverty line when determining eligibility). An SNT is overseen by a trustee who makes decisions regarding the disbursement of funds for the benefit of the trust’s beneficiary.

The primary purpose of a Special Needs Trust is to enhance the quality of life for the beneficiary with disabilities by supplementing public benefits and allowing the trust funds to cover various expenses that improve the beneficiary’s well-being.

2.2 Control and Management

One significant aspect of Special Needs Trusts is the control and management of the SNT assets. The trustee, who can be a family member, friend, or professional fiduciary, is responsible for managing the trust and making decisions regarding the disbursement of funds.

It is typically unwise to allow family members to serve as trustees as they rarely have the professional knowledge, training, or oversight that an institutional trustee possesses.

Unlike ABLE accounts, where the individual with disabilities has direct control over the account with no guidance on the possible loss of government benefits, Special Needs Trusts grant the trustee the authority to oversee the trust and guide the beneficiary. An SNT thus provides an additional layer of oversight and ensures that the funds are not misused and are for the sole benefit of the individual with disabilities.

2.3 Funding and Contribution Limits

Special Needs Trusts’ funding occurs through various sources, including personal injury settlements, inheritances, and gifts from family members. There are no specific funding limits or restrictions on the amount placed into a Special Needs Trust, however, it’s essential to consider the impact of large sums of money on public benefits eligibility.

Unlike ABLE accounts, institutional SNT trustees assist with guidance and knowledge to preserve government benefits.

While ABLE accounts have annual contribution limits, Special Needs Trusts may accept unlimited funding. This advantage of SNTs allows for flexibility in financing SNTs by accommodating significant financial contributions while maintaining eligibility for means-tested government benefits.

2.4 Qualified Expenses and Distributions

Special Needs Trusts allow for a broad range of qualified expenses using SNTs’ funds. These expenses include medical and dental care, therapy and rehabilitation services, housing and utilities, transportation, education and vocational training, entertainment and recreation, legal and advocacy fees, and other disability-related expenses.

It’s important to note that in the case of either an SNT or an ABLE account, the funds must be solely for the benefit of the individual with disabilities and used in a manner that does not jeopardize their eligibility for public benefits. The trustee must carefully manage the disbursement of funds and keep detailed records of expenses to demonstrate compliance with the trust’s requirements.

2.5 Payback to the State

One critical aspect of both ABLE accounts and Special Needs Trusts is the potential payback requirement to the state upon the beneficiary’s death. When the individual with disabilities passes away, any remaining funds may be subject to a payback provision, which requires reimbursement to the state for the Medicaid benefits provided during the beneficiary’s lifetime.

The payback provision ensures that Medicaid is reimbursed before any residual funds are distributed to other beneficiaries or heirs. However, the payback may be limited to the extent of Medicaid benefits received, and specific rules and exceptions vary from state to state.

Pooled SNTs (which are managed by nonprofit organizations, combine the resources of many beneficiaries for purposes of administrative cost-effectiveness and investment optimization, and whereby Individuals have their own sub-accounts and usually receive a proportionate share of the entire fund’s earnings) usually retain all residual funds after the beneficiary’s death; thus, the family receives no part of the remaining funds. The non-negotiable retention is one of the many shortcomings of Pooled Special Needs Trusts.

2.6 Pros and Cons of Special Needs Trusts

Special Needs Trusts offer several advantages and limited disadvantages that individuals and families should consider when evaluating their financial planning options:

Pros:

  • No age limit: In the case of a first-party party SNT, there is no minimum age limit on the onset of the disability or the creation of the SNT. A first-party SNT may be established at any time before age 65. (Note: ABLE accounts are more age-restrictive.)
  • Protection of assets: Special Needs Trusts safeguard the funds intended for individuals with disabilities, ensuring they are used for their benefit and not subject to mismanagement or exploitation.
  • Preservation of public benefits: By structuring the trust appropriately, individuals can maintain eligibility for means-tested public benefits, such as SSI and Medicaid, while still accessing additional funds for supplemental expenses.
  • Flexibility in funding: Unlike ABLE accounts, Special Needs Trusts have no contribution limits, allowing for the transfer of significant financial resources into the trust without jeopardizing public benefits eligibility.
  • No retention of residual assets by the government: In the case of a 3rd party SNT, 100% of the assets remaining in the SNT benefit the surviving heirs. In the case of a 1st party SNT, 100% of assets remaining after the state payback benefit the surviving heirs.
  • Wide range of qualified expenses: Special Needs Trusts allow for the payment of various disability-related expenses, providing individuals with the means to enhance their quality of life and access necessary support and services.
  • Quick and easy solutions: 1st party SNT and 3rd party SNT platforms like www.easternpointtrust.com provide convenient, fast, easy, and low-cost solutions.

Cons:

  • Potential payback to the state: If the Medicaid payback provision is triggered, the government may require reimbursement to the state for Medicaid benefits received during the beneficiary’s lifetime. This provision can impact the distribution of funds to heirs.
  • Limited control by the individual with disabilities: Some Special Needs Trusts grant the trustee significant decision-making authority over trust funds, potentially limiting the direct control and involvement of the individual with disabilities (see "Understanding the Impact of Fees on a Special Needs Trust or Settlement Protection Trust"). However, platforms like www.easternpointtrust.com specialize in empowering the beneficiary to guide the utilization of the funds.

3. ABLE Accounts: An Overview

3.1 Definition and Purpose

ABLE accounts (so named because their intent is “Achieving a Better Life Experience” for their beneficiary) are tax-advantaged savings accounts designed to help individuals with disabilities save for qualified disability-related expenses without jeopardizing eligibility for means-tested public benefits. The ABLE Act went into effect in 2014, and since then, numerous states have established ABLE programs to offer these accounts to eligible individuals.

The primary purpose of ABLE accounts is to empower individuals with disabilities to save and invest funds for a wide range of qualified expenses, such as education, housing, transportation, assistive technology, healthcare, and other disability-related costs. These accounts provide flexibility and independence in managing funds while maintaining eligibility for public benefits.

3.2 Control and Management

One significant difference between ABLE accounts and Special Needs Trusts is the level of control and management. ABLE accounts are owned and controlled by the individual with disabilities, referred to as the account beneficiary. ABLE accounts allow individuals to make unsupervised decisions regarding contributions, investments, and the disbursement of funds without requiring trustee approval. Of course, this comes with risks as the individual with disabilities has no guidance or support to ensure that their use of the funds does not result in the loss of government benefits or even payback of prior benefits.

The account beneficiary or their authorized representative manages the ABLE account, chooses investment options, and makes withdrawals for qualified expenses. While attractive to some, this level of control introduces significant risks with severe financial consequences. Consider the medical cost and financial risk if a disabled individual loses their Medicaid coverage because of an error in distribution type or documentation.

3.3 Funding and Contribution Limits

ABLE accounts’ funding can occur through various sources, such as personal contributions, family contributions, and contributions from friends and supporters. The annual contribution limit for ABLE accounts is tied to the federal gift tax exclusion, which, as of 2022, is $16,000 per year. Albeit unlikely, employed disabled individuals may be eligible to contribute an additional amount up to the federal poverty level for a one-person household ($12,880 in 2022).

It’s important to note that once the ABLE account balance reaches the state’s maximum limit, additional contributions are not allowed until the balance falls below the limit. The maximum limit varies by state and typically ranges from $235,000 to $529,000. However, the account balance can continue to grow through investment earnings.

3.4 Qualified Expenses and Distributions

ABLE accounts allow for the payment of qualified disability-related expenses, which include a broad range of categories such as education, housing, transportation, assistive technology, employment training and support, health and wellness, financial management, legal fees, and other expenses that enhance the individual’s quality of life.

Remember that the most significant risk with ABLE account regulations is to keep 100% accurate records and documentation of expenses paid from the account. This documentation will serve as evidence of the account’s appropriate use in the event of an audit or review.

3.5 Payback to the State

Like Special Needs Trusts, ABLE accounts are subject to a state Medicaid payback provision upon the beneficiary’s death.

For ABLE accounts, the payback is limited to Medicaid expenses incurred after establishing the account. The state can seek reimbursement for Medicaid benefits provided after the account opening but not for benefits provided before the account’s creation.

3.6 Pros and Cons of ABLE Accounts

ABLE accounts offer distinct advantages and disadvantages that individuals and families should consider when evaluating their financial planning options:

Pros:

  • Ownership and control: ABLE accounts provide individuals with disabilities direct ownership and control over their funds, allowing them to make decisions regarding contributions, investments, and qualified expenses.
  • Tax-advantaged savings: Contributions to ABLE accounts grow tax-free, and withdrawals for qualified expenses are also tax-free. This tax advantage allows individuals to maximize the growth of their savings and stretch their funds further.
  • Flexibility and independence: ABLE accounts offer flexibility in managing funds and making withdrawals for qualified expenses. Individuals can access their funds when needed without going through a trustee, promoting financial independence and self-determination.
  • Easy accessibility: ABLE accounts are relatively easy to set up and manage.

Cons:

  • Age Limitations: Currently, under all circumstances, the onset of the disability must have begun before age 26. However, in January 2026, the eligibility age for ABLE accounts will rise to 46.
  • Hidden fees: ABLE accounts may have higher than average investment fees, including payments to the sponsoring states.
  • Contribution limits: ABLE accounts have annual contribution limits tied to the federal gift tax exclusion. This limitation may restrict the amount of funds that can be deposited into the account, potentially limiting the growth of savings over time.
  • Qualified expense requirements: ABLE accounts require funds to be used for qualified disability-related expenses. Individuals have the sole duty to ensure that their expenses meet the applicable criteria to avoid potential penalties or disqualification of public benefits.
  • Payback provision: ABLE accounts are subject to payback provision upon the beneficiary’s death. This provision requires reimbursement to the state for Medicaid benefits received after the account’s establishment, reducing the funds available for distribution to heirs or beneficiaries.

4. Key Differences Between Special Needs Trusts and ABLE Accounts

Understanding the critical differences between Special Needs Trusts and ABLE accounts is crucial for individuals and families seeking to make informed decisions regarding their financial planning. The following sections highlight the primary distinctions between these options, focusing on control and management, funding and contribution limits, qualified expenses and distributions, and payback to the state.

4.1 Control and Management

One significant difference between Special Needs Trusts and ABLE accounts is the level of control and management.

Special Needs Trusts are supervised by a trustee, who has the authority to make decisions regarding the disbursement of funds on behalf of the beneficiary. The beneficiary relies on the trustee to perform all recordkeeping and provide guidance according to their best interests.

ABLE accounts provide individuals with disabilities with direct ownership and unsupervised control over their funds. The account beneficiary, or their authorized representative, manages the account and makes decisions regarding contributions, investments, and qualified expense payments. This level of control promotes self-determination and financial independence for individuals with disabilities. With the independence inherent in an ABLE account also comes the responsibility to ascertain that all distributions qualify as a disability-related expense and to document each of these transactions.

4.2 Funding and Contribution Limits

One significant difference between Special Needs Trusts and Special Needs Trusts do not have specific funding limits, allowing for the transfer of significant financial resources into the trust. There are no restrictions on the amount that can be placed into a Special Needs Trust.

ABLE accounts, on the other hand, have annual contribution limits tied to the federal gift tax exclusion. As of 2022, the annual contribution limit is $16,000. Additionally, individuals who are employed may be eligible to contribute an additional amount up to the federal poverty level for a one-person household ($12,880 in 2022). The maximum account balance also varies by state but typically ranges from $235,000 to $529,000.

4.3 Qualified Expenses and Distributions

Both Special Needs Trusts and ABLE accounts allow for the payment of qualified disability-related expenses. However, the scope of qualified expenses may differ slightly between the two options.

Special Needs Trusts allow for a wide range of qualified expenses, including medical and dental care, therapy and rehabilitation services, housing and utilities, transportation, education and vocational training, entertainment and recreation, legal and advocacy fees, and other expenses that enhance the beneficiary’s quality of life.

ABLE accounts also cover a broad range of qualified expenses, such as education, housing, transportation, assistive technology, healthcare, and other disability-related costs. However, it’s important to note that ABLE accounts may have specific guidelines and restrictions on qualified expenses, and documentation of all distributions of funds must be maintained to demonstrate compliance.

4.4 Payback to the State

Both Special Needs Trusts and ABLE accounts may be subject to a payback provision upon the beneficiary’s death. However, the payback requirements differ between the two options.

For Special Needs Trusts, the payback provision may require reimbursement to the state for Medicaid benefits received during the beneficiary’s lifetime. The payback amount is typically limited to the extent of Medicaid benefits provided, and specific rules and exceptions vary from state to state.

For ABLE accounts, the payback provision is more limited. The state can seek reimbursement for Medicaid benefits provided after the establishment of the account, but not for benefits provided before the account’s creation. This limited payback provision allows individuals to benefit from the funds in their ABLE accounts during their lifetime while still preserving some assets for their heirs.

4.1 Control and Management

One significant difference between Special Needs Trusts and ABLE accounts is the level of control and management.

Special Needs Trusts are supervised by a trustee, who has the authority to make decisions regarding the disbursement of funds on behalf of the beneficiary. The beneficiary relies on the trustee to perform all recordkeeping and provide guidance according to their best interests.

ABLE accounts provide individuals with disabilities with direct ownership and unsupervised control over their funds. The account beneficiary, or their authorized representative, manages the account and makes decisions regarding contributions, investments, and qualified expense payments. This level of control promotes self-determination and financial independence for individuals with disabilities. With the independence inherent in an ABLE account also comes the responsibility to ascertain that all distributions qualify as a disability-related expense and to document each of these transactions.

5. Choosing the Right Option: Factors to Consider

When deciding between a Special Needs Trust and an ABLE account, several factors should be considered to ensure the most suitable option. The following considerations can guide individuals and families in making informed decisions that align with their needs and goals.

5.1 Eligibility Criteria

Eligibility criteria significantly determine whether a Special Needs Trust or an ABLE account is the most appropriate option. Special Needs Trusts are available to individuals of all ages, regardless of the age of onset of the disability. They are beneficial for individuals who may not meet the eligibility requirements for ABLE accounts due to age or other factors.

To qualify for an ABLE account, the individual must have developed a disability before age 26. This age limitation prevents individuals who acquire disabilities later in life from creating an ABLE account.

5.2 Financial Resources

The amount of financial resources available can influence the decision between a Special Needs Trust and an ABLE account. Special Needs Trusts are well-suited for individuals with significant financial resources, as there are no specific funding limits or restrictions on the amount placed into the SNT.

ABLE accounts, on the other hand, have annual contribution limits tied to the federal gift tax exclusion. While ABLE accounts offer tax-advantaged savings and flexibility in managing funds, the contribution limits may restrict the amount of funds allowed.

5.3 Future Planning

Considering long-term financial planning and future needs is essential when choosing between a Special Needs Trust and an ABLE account. Special Needs Trusts provide comprehensive planning options, allowing individuals to transfer substantial assets into the trust for the benefit of the individual with disabilities. This long-term planning approach ensures that funds are available to support the individual’s needs throughout their lifetime.

While offering flexibility and independence, ABLE accounts may be more appropriate for small amounts, which are better suited to short-to-medium-term planning.

5.4 Flexibility and Control

The desired level of flexibility and control can also guide the decision between a Special Needs Trust and an ABLE account. Special Needs Trusts provide a structured approach with a trustee responsible for managing and disbursing funds on behalf of the beneficiary. This arrangement ensures oversight and compliance with the trust’s requirements.

ABLE accounts, on the other hand, grant individuals with disabilities direct ownership and control over their funds. This arrangement creates risks for the loss of government benefits.

5.5 Professional Guidance

Navigating the complexities of financial planning for individuals with disabilities requires professional guidance. Engaging a provider with expertise in disability planning is crucial for establishing Special Needs Trusts and ABLE accounts. These professionals can provide valuable insights, ensure compliance with regulations, and tailor the planning approach to individual needs and circumstances.

Consulting with a trust company specializing in disability planning can also be beneficial, as they guide on strategies, tax implications, and the coordination of benefits to maximize financial resources and long-term security.

6. Combination Strategies: Maximizing Benefits

In some cases, individuals and families may find that a combination of a Special Needs Trust and an ABLE account offers the most comprehensive approach to financial planning. By leveraging the benefits of both options, individuals can maximize financial resources and maintain eligibility for means-tested public benefits.

6.1 Using Both SNTs and ABLE Accounts

Combining a Special Needs Trust with an ABLE account can provide individuals with disabilities with a robust financial planning strategy. Special Needs Trusts can accommodate significant financial resources, allowing for long-term planning and the transfer of substantial assets. ABLE accounts, on the other hand, offer flexibility and independence in managing funds for short-to-medium-term disability-related expenses.

By utilizing both options, individuals can benefit from the long-term security and comprehensive planning of a Special Needs Trust while enjoying the accessibility and control provided by an ABLE account. This combination approach allows for the preservation of assets and the ability to save and spend funds as needed.

6.2 Coordinating Benefits and Minimizing Overlaps

When utilizing both a Special Needs Trust and an ABLE account, it’s essential to coordinate benefits and minimize overlaps. Careful consideration should be given to the types of expenses covered by each option and the most appropriate source of funds for each expense payment.

Effectively coordinating benefits can help individuals avoid duplication of funds and ensure each option obtains its fullest potential. This coordination may involve working closely with the trustee of the Special Needs Trust and maintaining clear documentation of expenses paid from the ABLE account.

7. Conclusion

Navigating the financial planning landscape for individuals with disabilities requires a comprehensive understanding of available options. Special Needs Trusts and ABLE accounts offer valuable tools for managing funds, preserving eligibility for public benefits, and enhancing the quality of life for individuals with disabilities.

Financial planning for individuals with disabilities is a complex and evolving field. It is always advisable to consult with a professional specializing in disability planning and with expertise in this area to ensure that the chosen approach meets specific needs and complies with applicable laws and regulations.

8. FAQs

Can an individual have both a Special Needs Trust and an ABLE account? Yes, individuals can have both a Special Needs Trust and an ABLE account. Each option offers unique benefits and advantages, and utilizing both can provide a comprehensive and flexible financial planning strategy.

Are there limits to the amount of funds that can be placed into a Special Needs Trust? Special Needs Trusts do not have funding limits or restrictions on the amount that can be placed into the trust.

Can ABLE account funds be used for any type of expense? ABLE account funds must be used for qualified disability-related expenses. While the list of qualified expenses is broad, individuals must ensure that their expenses meet the criteria to avoid potential penalties or disqualification of public benefits.

Is there a payback requirement for ABLE accounts? ABLE accounts are subject to a payback provision upon the beneficiary’s death. The payback typically includes 100% of the Medicaid benefits received after establishing the ABLE account, allowing individuals to benefit from the funds during their lifetime.

How can I determine which option is most suitable for my circumstances? Choosing between a Special Needs Trust and an ABLE account requires careful consideration of individual needs, financial resources, long-term planning goals, flexibility and control preferences, and professional guidance. Consulting with an attorney and a financial advisor specializing in disability planning is crucial for making an informed decision.

9. Additional Information

For more detailed information on Special Needs Trusts, the applicable fees, and how they can impact government benefits, visit www.easternpointtrust.com. We can provide solutions tailored to your situation and fully transparent information about trust administration.

Finally, remember that special needs trust administration is a complex process that requires attention to detail, a strong understanding of financial and legal concepts, and a commitment to acting in the best interests of the trust’s beneficiaries. By educating yourself about the process and seeking professional advice when needed, you can help ensure that your SNT serves its intended purpose and provides for your loved ones in the most effective manner possible.

Seek brands that maintain a formal, professional tone and utilize technical, regulatory, and financial terms throughout the communication. The style conveys authority, expertise, and dependability, aiming to resonate intellectually with its audience. The brand persona reflects a knowledgeable industry leader committed to educating and guiding its clients through complex financial matters.

10. Additional Resources

For additional information and resources on Special Needs Trusts, ABLE accounts, and financial planning for individuals with disabilities, please refer to the following:

  • Internal Revenue Service (IRS) The official website of the IRS provides information on tax-advantaged savings options, including ABLE accounts. The IRS offers guidance on contribution limits, qualified expenses, and tax implications.
  • Social Security Administration (SSA) The SSA provides information on public benefits, eligibility criteria, and important considerations when planning for individuals with disabilities. The SSA’s website offers resources on Special Needs Trusts and ABLE accounts.
  • National Disability Institute (NDI) NDI is a nonprofit organization that promotes financial independence and asset development for individuals with disabilities. Their website provides resources and educational materials on financial planning, including ABLE accounts.

 

Disclosure: This content is an overview. It is not a detailed analysis and offers no legal or tax opinion on which you should solely rely. Always seek the advice of competent legal and tax advisors to review your specific facts and circumstances before making any decisions or relying on the content herein.
Any opinions, views, findings, conclusions, or recommendations expressed in the content contained herein are those of the author(s) and do not necessarily reflect the view of the Eastern Point Trust Company, its Affiliates, or their clients. The mere appearance of content does not constitute an endorsement by Eastern Point Trust Company (“EPTC”) or its Affiliates. The author’s opinions are based upon information they consider reliable, but neither EPTC nor its Affiliates, nor the company with which such author(s) are affiliated, warrant completeness, accuracy or disclosure of opposing interpretations.

EPTC and its Affiliates disclaim all liability to any party for any direct, indirect, implied, special, incidental, or other consequential damages arising directly or indirectly from any use of the content herein, which is expressly provided as is, without warranties.
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