ABLE accounts are tax-advantaged savings and investment accounts for disabled individuals. We often get questions about the difference between an ABLE Account and a Supplemental Needs Trust and whether one is better than the other for a disabled child. There are several planning techniques that you can take advantage of to protect assets on behalf of your child with special needs. ABLE accounts were enacted under the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014, known as the ABLE Act. The Act recognizes that living with a disability can be costly and created a simplified way for families to put money away for a disabled individual.
Before exploring ABLE accounts, it is important to understand the different options available when planning for a disabled child’s future. At the outset, Supplemental Needs Trusts, also known as a Special Needs Trusts, are often used to protect assets for disabled individuals. Assets and income in an SNT can be used for a disabled individual’s benefit without disqualifying them from receiving government benefits. There is no limit to the amount of assets that can be placed in a properly drafted SNT. The assets in the trust are handled by a Trustee to enhance the quality of life of a person with disabilities without interfering with any government benefits, such as Supplemental Security Income, Medicaid, FAFSA, HUD and SNAP/food stamp benefits.
Generally speaking, there are two categories of Supplemental Needs Trusts (“SNT”): a First-Party SNT and a Third-Party SNT. A First-Party SNT protects assets that belong to the disabled individual (e.g., a personal injury award). A Third-Party SNT is funded for the benefit of the disabled person using someone else’s assets (e.g., an inheritance from a parent). An important difference between the two trusts is the distribution of assets upon the death of the disabled person. Specifically, a First-Party SNT must pay back any monies paid by Medicaid during the disabled person’s lifetime. In contrast, a Third-Party SNT does not have to pay back Medicaid.
The creation of an ABLE account is an important step forward for special needs planning. It provides a simple solution when relatively modest amount of assets is involved. An ABLE Account can be used on its own or in conjunction with a SNT. To be eligible for an ABLE account, a person must have a qualifying disability that was present before the age of 26, with one of the following:
- Classified as blind (as defined in the Social Security Act);
- Entitled to Supplemental Security Income or Social Security Disability Insurance because of the disability;
- Have a disability that is included on the Social Security Administration’s List of Compassionate Allowances Conditions; or
- Have a written diagnosis from a licensed physician documenting a medically determinable physical or mental impairment which results in marked and severe functional limitations, that can be expected to last for at least a year or can cause death.
An ABLE account can be created by the disabled individual, parent, guardian, or agent under a power of attorney. ABLE accounts are considered a tax advantaged way to save and pay for disabled individuals’ qualified expenses without jeopardizing eligibility for critical government benefits. Any contributions can grow tax free. Distributions, including earnings, from the ABLE account are tax-free to the beneficiary – if used to pay qualified disability expenses. Some examples of qualified expenses include housing, transportation, education, assistive technology, and legal fees. If the ABLE account is used for non-qualified expenses, the “earnings” portion of the withdrawal is treated as income and is subject to federal and state taxes, as well as a 10% federal tax penalty.
The beneficiary of an ABLE account can also contribute their income to the account, up to the poverty-line amount for a one-person household. For 2021, this amount is $ the poverty-line amount for a one-person household $12,880.00. This contribution is not allowed if their employer contributes to a workplace retirement plan.
Importantly, total annual contributions to ABLE accounts cannot exceed the federal annual gift tax exclusion ($15,000 in the year 2021) – from all sources. Up to a certain amount, the money in an ABLE account will not interfere with Supplemental Security Income (“SSI”) or Medicaid benefits. However, there are limitations for individuals receiving SSI. Specifically, when an ABLE account balance over $100,000 exceeds the SSI resource limit (on its own or combined with other resources), the SSI payments are suspended. SSI resumes when the countable resources are again below the allowable limit. Medicaid benefits remain unaffected.
Similar to the above mentioned First-Party SNT, when an ABLE account beneficiary dies, there is a payback to Medicaid for Medicaid-related expenses. This payback exists regardless of who made contributions to the ABLE account.
Creating and funding an ABLE account can provide a disabled person with a sense of autonomy, while preserving much needed government benefits. It works much like a 529 Plan for education, but for qualified expenses instead of education. Whether an SNT, ABLE Account or both should be used depends on each family’s situation. Special Needs planning involves putting together a comprehensive estate plan for the entire family so that all the different parts work together. At Burner Law Group, our attorneys are experienced in special needs planning. We can help you provide for a disabled individual after you are gone in a way that affords them the greatest independence.