Using ABLE Accounts and Special Needs Trusts

It’s unfortunate that the most vulnerable people among us often face the greatest obstacles when navigating the complexities of special needs arrangements. For individuals with disabilities, the very systems designed to promote financial stability can become intricate and overwhelming, making it increasingly difficult to achieve financial security and independence. When planning for the financial future of a family member with disabilities, understanding the benefits of both ABLE accounts and Special Needs Trusts (SNTs) is crucial. While both serve important objectives, combining them can provide a more robust financial strategy that enhances independence and security.

About ABLE Accounts

As the ABLE (Achieving a Better Life Experience) account marks its 10th anniversary in 2024, it continues to revolutionize financial planning for individuals with disabilities. This innovative savings tool allows people with disabilities to work and accumulate funds for qualified disability expenses without jeopardizing their eligibility for vital assistance programs like Supplemental Security Income (SSI) and Medicaid.

For those receiving SSI benefits of $943 per month or Medicaid health insurance throughout 2024, strict asset limitations have long been a financial hurdle. Traditionally, individuals were confined to a mere $2,000 in assets, while couples faced a $3,000 limit to maintain their benefits. The ABLE account shatters these constraints, offering a solution that provides much-needed financial flexibility and independence.

By allowing savings of up to $100,000 at any given time without affecting SSI benefits, ABLE accounts empower individuals with disabilities to build financial security while preserving access to essential support programs. This groundbreaking approach not only enhances financial well-being but also promotes greater autonomy and quality of life for people with disabilities.

Key Features of ABLE Accounts 

Eligibility

Initially designed for those who became blind or disabled before age 26, ABLE accounts are set to become even more inclusive. Starting in 2026, the age threshold will increase to 46, opening doors for many more individuals.

Opportunity

ABLE accounts encourage individuals to work according to their full potential and save for their needs, without bumping up against impoverishing asset limits. 

Tax Advantages

Similar to 529 Plans, ABLE accounts often come with state tax deductions. Furthermore, earnings on investments in ABLE accounts grow tax-free. Distributions from ABLE accounts are also tax-free when used for qualified disability expenses. 

Flexible Contribution Limits

While lifetime maximums mirror 529 Plans, it’s best to keep the account balance below $100,000. Only cash contributions and distributions are allowed, regardless of how you invest them alongside the banking arrangement offered within the plan.  

Broad Expense Coverage

From rent to groceries, ABLE accounts cover most day-to-day expenses; steer clear of vices such as alcohol, cigarettes, and gambling. 

NO Impact on Government Benefits 

Thankfully ABLE account balances don’t impact eligibility for SSI or Medicaid.  

Word of Caution About ABLE Accounts

Most states have a Medicaid Payback Provision, allowing the state to reimburse itself from the ABLE balance for medical bills after the account holder’s passing, before funds are distributed to the family. 

Kansas and up to 10 other states (out of 46 that sponsor ABLE accounts) have removed this clawback provision, incentivizing the use of these accounts.

In summary, ABLE accounts are an excellent resource for families caring for a child with disabilities as it simplifies how to plan for their future. Separate, but related, are Special Needs Trusts.

About Special Needs Trusts (SNT’s)

SNT’s are designed to help families support individuals with a disability and preserve eligibility for government benefits. 

Let’s explore some key features that make SNT’s so beneficial.

Key Features of SNT’s

Versatile Asset Holdings

SNTs can hold a variety of assets without jeopardizing the beneficiary’s eligibility for government benefits. Examples include:

• Homes and vehicles
• Rental real estate
• Investments
• Cash
• Retirement accounts (e.g., IRAs and Roth IRAs)

This flexibility allows for comprehensive financial planning while maintaining eligibility for crucial support programs.

Clear Management and Inheritance Guidelines

The trust document provides:

• Detailed management instructions for the trustee
• Designated heirs for the assets after the beneficiary’s passing

Notably, SNTs are protected from Medicaid clawback, enhancing estate planning certainty, especially with substantial assets like life insurance death benefits coming from family members.

Flexibility In Use

SNTs offer significant flexibility by:

• Covering needs not addressed by government benefits
• Generating investment income

Understanding these nuances enables families to maximize the benefits of SNTs while remaining compliant with government program requirements.

Combining the Benefits of Each Tool

Separation of Funds for Intended Use

Utilizing both an ABLE account and an SNT allows families to allocate funds based on their specific purposes. For instance, the ABLE account can be designated for day-to-day needs, encouraging the individual’s participation in managing their finances. Meanwhile, the SNT can be reserved for longer-term goals, creating a strategy that promotes financial synergy and supports a well-rounded financial plan.

Promoting Financial Independence

One of the standout features of ABLE accounts is that they enable individuals with disabilities to work and earn an income while allowing them to save beyond the $2,000 asset limit imposed by Medicaid. This feature not only fosters greater financial independence but also encourages individuals to use their God-given talents in the community. Unlike SNTs, which can have restrictions on certain expenses, ABLE accounts can cover essential costs such as food and rent, making them a vital component of financial planning.

Tax Advantages

ABLE accounts offer significant tax benefits, including tax-free growth and tax-free withdrawals for qualified expenses. Additionally, some states provide tax deductions for contributions to these accounts. In contrast, SNTs are fully taxable each year, similar to brokerage accounts. If the SNT is irrevocable, it will require a separate tax return.

Conclusion

Establishing both an ABLE account and a Special Needs Trust is well worth the effort for managing resources and providing opportunities for family members with disabilities.

ABLE accounts are affordable and easy to set up, offering significant tax advantages and flexibility for various expenses—though it’s essential to understand your state’s Medicaid Payback provisions. On the other hand, while Special Needs Trusts may be more complex and costly, they help maintain eligibility for government benefits, allow for unlimited asset accumulation, and ensure your estate planning wishes are honored. 

Open communication with family members—such as grandparents and other loved ones—about these financial arrangements is vital to avoid misunderstandings and to ensure everyone is on the same page. Careful planning is crucial, so consulting with an attorney and your advisory team is highly recommended to create a comprehensive financial strategy.

Combining ABLE accounts and Special Needs Trusts can provide a powerful strategy for families seeking to maximize their financial resources for individuals with disabilities. By separating funds based on their intended use, promoting financial independence, leveraging tax benefits, and coordinating contributions carefully, families can create a comprehensive financial plan that supports both immediate needs and long-term goals. Through informed planning and open communication, families can navigate these financial tools to secure a brighter future.

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