Planning for the financial future of a loved one with disabilities requires a careful understanding of the available legal and financial tools. Two of the most common options for protecting assets while preserving eligibility for government benefits are ABLE (Achieving a Better Life Experience) accounts and Special Needs Trusts (SNTs). Each serves a different purpose and offers unique advantages and limitations.
If you are considering long-term financial planning for a loved one with special needs, understanding the differences between these two options is crucial. Contact us by either using the online form or calling us directly at 414-253-8500 for legal assistance.
Understanding ABLE Accounts
ABLE accounts were created under the ABLE Act of 2014 to provide tax-advantaged savings for individuals with disabilities. These accounts allow qualified individuals to save money without jeopardizing their eligibility for Supplemental Security Income (SSI), Medicaid, and other government programs.
Key Features of ABLE Accounts
- Eligibility: The beneficiary must have a qualifying disability that began before age 26.
- Annual Contribution Limit: Contributions are capped at $18,000 per year (as of 2024).
- Total Account Limit: The total account balance varies by state but often aligns with the state's 529 plan limits (typically between $300,000-$500,000). However, SSI eligibility is affected if the account balance exceeds $100,000.
- Tax Benefits: Earnings grow tax-free, and withdrawals are tax-free if used for qualified disability expenses (QDEs), such as housing, education, healthcare, and transportation.
- Medicaid Payback: After the beneficiary's death, remaining funds in the ABLE account may be subject to Medicaid reimbursement, meaning Medicaid can claim funds for expenses paid on the individual's behalf.
- Control and Accessibility: The disabled individual (or an authorized legal representative) controls the account and can use the funds flexibly.
Who Should Consider an ABLE Account?
An ABLE account is ideal for individuals who:
- Have a disability that qualifies under the age-26 requirement.
- Need a simple, flexible way to save and spend money on disability-related expenses.
- Expect to have modest savings and occasional financial gifts from family or friends.
- Want direct access to their funds without needing a trustee to oversee distributions.
Understanding Special Needs Trusts (SNTs)
A Special Needs Trust (SNT) is a more structured financial planning tool that allows individuals with disabilities to receive and manage assets without impacting eligibility for government benefits. SNTs can hold an unlimited amount of money and offer more comprehensive financial protection than ABLE accounts.
Types of Special Needs Trusts
There are three main types of SNTs, each with different rules and benefits:
-
First-Party Special Needs Trust
- Funded with the beneficiary's own assets, such as inheritance, lawsuit settlements, or savings.
- Must be irrevocable and created before the beneficiary turns 65.
- Subject to Medicaid payback upon the beneficiary's death.
-
Third-Party Special Needs Trust
- Created and funded by someone other than the beneficiary (e.g., parents, grandparents).
- Not subject to Medicaid reimbursement after the beneficiary's death.
- Can be included in estate planning to pass down wealth without disrupting benefits.
-
Pooled Special Needs Trust
- Managed by a nonprofit organization and combines assets from multiple beneficiaries.
- Each beneficiary has a separate account, but funds are pooled for investment purposes.
- Medicaid payback rules vary based on the state and trust administrator.
Key Features of Special Needs Trusts
- No Contribution Limits: Unlike ABLE accounts, SNTs can hold unlimited funds.
- Not Subject to SSI Asset Limits: Since the funds are not directly accessible to the beneficiary, they do not count toward SSI's $2,000 individual asset limit.
- Broader Expense Coverage: Funds can be used for a wide range of expenses, including entertainment, vacations, personal care, and more, as long as they do not cover food or housing (which could impact SSI benefits).
- Trustee Management: A designated trustee controls the funds and ensures that distributions comply with legal requirements.
Who Should Consider a Special Needs Trust?
A Special Needs Trust is beneficial for individuals who:
- Expect to receive a large inheritance, legal settlement, or financial gifts.
- Need long-term financial protection and structured fund management.
- Do not meet the age-of-onset requirement for ABLE accounts.
- Want to ensure that assets remain protected from Medicaid payback (for third-party SNTs).
Key Differences Between ABLE Accounts and Special Needs Trusts
While both ABLE accounts and Special Needs Trusts serve the purpose of protecting assets for individuals with disabilities, they differ significantly in terms of eligibility, funding, tax benefits, spending flexibility, and Medicaid recovery rules.
ABLE Accounts vs. Special Needs Trusts: A Side-by-Side Comparison
| Feature | ABLE Account | Special Needs Trust (SNT) |
|---|---|---|
|
Eligibility |
Must have a qualifying disability that began before age 26 |
No age-of-onset requirement |
|
Who Can Fund It? |
Beneficiary, family, friends, or other third parties |
Depends on the type: First-party (beneficiary's own assets); Third-party (family, friends, estate planning) |
|
Annual Contribution Limit |
$18,000 per year (as of 2024) |
No contribution limits |
|
Total Asset Limit |
Varies by state; SSI eligibility affected if balance exceeds $100,000 |
Unlimited |
|
Control Over Funds |
Beneficiary (or legal representative) manages account |
Trustee controls distributions |
|
Qualified Expenses |
Disability-related expenses, including housing, healthcare, education, and transportation |
Covers a broader range of expenses, excluding basic food and housing (to avoid reducing SSI benefits) |
|
Tax Benefits |
Earnings grow tax-free; withdrawals for qualified expenses are tax-free |
No tax benefits, but assets are shielded from affecting government benefits |
|
Impact on Government Benefits |
SSI suspended if account balance exceeds $100,000 |
Does not affect SSI or Medicaid eligibility |
|
Medicaid Payback |
Yes-Medicaid may recover costs after the beneficiary's death |
First-party SNTs require Medicaid payback; Third-party SNTs do not |
Choosing Between an ABLE Account and a Special Needs Trust
Choosing between an ABLE account and a Special Needs Trust depends on your financial goals, funding sources, and long-term planning needs. In many cases, families use both to maximize flexibility while ensuring financial security.
When to Use an ABLE Account
An ABLE account is ideal when:✔️ The beneficiary qualifies under the age 26 disability requirement.✔️ There is a need for day-to-day spending flexibility on disability-related expenses.✔️ The goal is to save modest amounts without exceeding the SSI asset limit ($100,000).✔️ Tax-free growth and low-cost management are a priority.
When to Use a Special Needs Trust
A Special Needs Trust is more suitable when:✔️ The beneficiary is over age 26 at the onset of the disability.✔️ Large sums of money (inheritance, settlement, or financial gifts) need to be protected.✔️ Long-term financial security and structured asset management are priorities.✔️ Medicaid payback needs to be avoided (only possible with a third-party SNT).
Using Both Together
Many families find that using both an ABLE account and a Special Needs Trust provides the best of both worlds. For example:
- A Special Needs Trust can hold large inheritances or legal settlements without affecting benefits.
- An ABLE account can provide the beneficiary direct access to smaller funds for everyday expenses.
- Trustees can transfer small amounts from an SNT into an ABLE account for flexible use.
Common Misconceptions About ABLE Accounts and Special Needs Trusts
Many families are confused about the rules surrounding these financial tools. Here are some common myths debunked:
1. "An ABLE account can replace a Special Needs Trust."
❌ False: ABLE accounts have strict contribution and total asset limits. An SNT is better suited for long-term asset protection and large financial gifts.
2. "Special Needs Trusts are only for the wealthy."
❌ False: While SNTs are often used to protect large sums, they are also valuable for moderate savings and long-term care planning.
3. "An ABLE account can pay for anything."
❌ False: Only qualified disability expenses (QDEs) are allowed; using funds for non-qualified expenses could result in tax penalties and loss of benefits.
4. "If I set up a Special Needs Trust, my loved one will lose their SSI and Medicaid benefits."
❌ False: A properly structured SNT ensures that assets are not counted against SSI or Medicaid eligibility.
5. "Medicaid will always take the remaining money in a Special Needs Trust."
❌ Partially True: First-party SNTs require Medicaid payback, but third-party SNTs do not-making them a crucial estate planning tool.
Contact a Special Needs Planning Attorney
Planning for a loved one with disabilities requires careful legal and financial strategy. Whether you are considering an ABLE account, a Special Needs Trust, or both, the right choice depends on your family's financial situation, eligibility criteria, and long-term goals.
At Heritage Law Office, we can help you navigate these options and create a plan that safeguards your loved one's financial future and benefits eligibility.
📞 Call us today at 414-253-8500 or contact us online to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What expenses can be paid from an ABLE account?
An ABLE account can be used for qualified disability expenses (QDEs), which include housing, healthcare, education, transportation, assistive technology, legal fees, and other costs that improve the beneficiary's quality of life. However, non-qualified expenses may result in tax penalties and impact government benefits.
2. Can a Special Needs Trust and an ABLE account be used together?
Yes, many families use both to maximize financial flexibility. A Special Needs Trust holds larger funds and provides long-term financial security, while an ABLE account allows the beneficiary to access money more easily for daily expenses. Trustees can also transfer small amounts from an SNT into an ABLE account for added flexibility.
3. What happens to an ABLE account or Special Needs Trust when the beneficiary passes away?
- ABLE accounts are subject to Medicaid payback, meaning any remaining funds may be used to reimburse Medicaid for benefits received.
- First-party Special Needs Trusts also require Medicaid payback.
- Third-party Special Needs Trusts, funded by family members, do not require Medicaid payback and can distribute remaining funds to other heirs.
4. Who can manage an ABLE account or a Special Needs Trust?
- ABLE accounts can be managed by the beneficiary or an authorized legal representative, such as a parent or guardian.
- Special Needs Trusts are managed by a trustee, who is responsible for distributing funds in a way that complies with government benefit rules.
5. Are there tax benefits for using an ABLE account or a Special Needs Trust?
- ABLE accounts offer tax-free growth on earnings, and withdrawals for qualified disability expenses are tax-free.
- Special Needs Trusts do not have tax advantages for the beneficiary, but they protect assets from being counted against government benefit eligibility.