ABLE Accounts and Special Needs Trusts: How They Work to Benefit Persons with Special Needs
Maximizing Financial Security: Using ABLE Accounts and Special Needs Trusts to Benefit Persons with Special Needs Trusts
When planning for the future
financial security of individuals with disabilities, it’s essential to explore all available options. Two powerful tools in this regard are ABLE (Achieving a Better Life Experience) accounts and Special Needs Trusts (SNTs). Both have unique benefits and can be used in tandem to ensure comprehensive financial support while preserving eligibility for vital government benefits. Here’s a detailed look at how these two tools can be effectively combined.
What is an ABLE Account?
An ABLE account is a tax-advantaged savings account specifically designed for individuals with disabilities. Established under the ABLE Act of 2014, these accounts allow for tax-free growth of funds, provided they are used for qualified disability expenses such as education, housing, transportation, and healthcare. Key features include:
1. Tax Benefits: Contributions grow tax-free, and withdrawals for qualified expenses are also tax-free. Both the disabled individual and third parties (e.g., parents) can make contributions.
2. Contribution Limit: Annual contributions are capped at $17,000 (as of 2024) per beneficiary. Total contributions can accumulate up to the state limit for education-related 529 plans.
3. Eligibility: The beneficiary must have become disabled before age 26.
4. Medicaid payback: The ABLE Act includes Medicaid payback rules upon the beneficiary’s death, meaning the state Medicaid agency can claim reimbursement for Medicaid benefits paid to the beneficiary after the account was established.
What is a Special Needs Trust?
A Special Needs Trust (SNT) is a legal arrangement designed to manage and protect assets for a person with disabilities. It ensures that the beneficiary can receive financial support without jeopardizing eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). There are two main types:
1. First-Party Special Needs Trust: Funded with the beneficiary’s own assets, often used when they receive a large sum of money, such as an inheritance or personal injury settlement. Requires a Medicaid payback upon death of the beneficiary.
2. Third-Party Special Needs Trust: Funded by someone other than the beneficiary, such as parents or other family members, typically as part of estate planning. No Medicaid payback required upon death of the beneficiary.
Using ABLE Accounts and Special Needs Trusts Together
Combining ABLE accounts and Special Needs Trusts can maximize financial security and flexibility for individuals with disabilities. Here’s how:
1. Preserving Benefits: Both ABLE accounts and SNTs protect the beneficiary’s eligibility for means-tested government benefits. ABLE accounts allow up to $100,000 in savings without affecting SSI benefits, while all funds (regardless of value) in a properly managed SNT do not count as the beneficiary’s assets.
2. Flexible Spending: ABLE accounts can be used for a wide range of qualified disability expenses with more flexibility in spending compared to SNTs, which often have stricter guidelines. Using an ABLE account for daily expenses and an SNT for larger, long-term needs can provide optimal financial management.
3. Tax Advantages: While SNTs do not offer the same tax benefits as ABLE accounts, combining the two allows beneficiaries to enjoy the tax-free growth and withdrawals from ABLE accounts alongside the larger funding capabilities of SNTs.
4. Managing Contributions and Expenditures: Contributions to an ABLE account are limited annually, but there’s no limit on how much can be contributed to an SNT. Families can use an SNT to accumulate and manage larger sums of money, transferring funds to an ABLE account as needed to take advantage of its tax benefits.
5. Supplementing Income: A SNT can cover expenses not allowed under ABLE accounts or government benefits, such as vacations, electronics, and luxury items, providing a higher quality of life.
Practical Example
Consider Susan, a 22-year-old with a disability. Her parents set up a Third-Party Special Needs Trust and contribute $50,000 from an inheritance. They also open an ABLE account for Susan and contribute $17,000 annually. Here’s how this works in practice:
– Daily Expenses: Susan uses her ABLE account for daily expenses like rent, transportation, and medical costs.
– Long-Term Needs: The SNT covers long-term or non-qualified expenses, such as vacations, advanced education, or a new vehicle.
– Preserved Benefits: Susan remains eligible for SSI and Medicaid, as the assets in both the ABLE account and the SNT do not count against her asset limits for these programs.
Conclusion
By leveraging the strengths of both ABLE accounts and Special Needs Trusts, families can provide comprehensive financial support for individuals with disabilities. These tools not only ensure the preservation of essential government benefits but also offer flexibility and tax advantages that can enhance the beneficiary’s quality of life. By planning strategically and staying informed, beneficiaries and their families can better manage their finances and ensure that funds are used effectively while minimize the impact of Medicaid reimbursement claims.
This area of law is complex, and requires careful planning. Most estate planning attorneys do not handle special needs planning and are not familiar with public benefits programs or how to administer these unique types of trusts or ABLE accounts. Proper planning and management are key to maximizing these benefits, so consulting with an attorney specializing in special needs planning is vital.
If you are in Arizona, we at Bivens & Associates PLLC can help with your family’s special needs planning. We have extensive experience in working with families with loved ones, whether adults or children, who have special needs, and can help you craft the right special needs trust (first and/or third party) and overall plan to best provide for the financial security of your special loved one. Call today to schedule a consultation 480-922-1010 or email info@bivenslaw.com.
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