There has been a lot of excitement over the development of ABLE accounts recently. While ABLE accounts can be helpful planning tools for people with disabilities, they are certainly not a replacement for Special Needs Trusts. We’ll briefly look at why that is later, but first…
What Are Special Needs Trusts?
Special Needs Trusts (SNTs) are well-established planning tools that can also protect eligibility of the disabled beneficiary for government benefit programs. They are vitally important for people with disabilities. And there are two common types of SNTs.
First-Party SNTs, or d4(a) SNTs, are funded by assets originally belonging to the beneficiary (i.e. like a lawsuit settlement). The First-Party SNTs must be established before the beneficiary reaches age 65.
Third-Party SNTs are typically funded with someone else’s money (i.e. a third party like parents or grandparents). This type of SNT is more useful in traditional estate planning, and the Third-Party SNT is commonly used to receive inheritances when the beneficiary is also receiving certain government benefits. This way the disabled beneficiary can receive the inheritance AND keep their existing government benefits.
What Are ABLE Accounts?
An ABLE account offers a tax-advantaged savings option that does not interfere with an individual’s eligibility for means-tested government benefits, like Supplemental Security Income (SSI) and Medicaid. ABLE accounts are only available to individuals whose disability onset occurred prior to the age of 26 and meets significant functional limitations as a result of the disability. These eligibility requirements are continuing to be reviewed and refined by Congress.
Why Do We Need SNTs and ABLE Accounts?
ABLE accounts were not designed to have the planning advantages a beneficiary gets with SNTs, but the ABLE account can be a great partner to SNTs. ABLE accounts have a few limitations that result in them being commonly used for certain applications, but not as an all-encompassing planning tool.
Here are some of the limitations or downsides to solely relying on an ABLE account for special needs planning:
- Currently, you can only contribute $15,000 per year. This is the total amount that can go into an ABLE account in a calendar year, and an individual can only have one ABLE account. This significantly limits their ability to be used with estate planning.
- Any amount over $100,000 that accrues in the ABLE account, counts towards the individual’s $2,000 resource limit for SSI eligibility. Or said another way, if a beneficiary is receiving SSI, there is a cap on the amount an ABLE account can hold for the beneficiary.
- Each state has a separate asset limit that applies toward beneficiaries receiving Medicaid through their home state. This limit is typically in the $250,000-$400,000 range, and again this is a total asset limit.
- Investment options are limited to what your state program makes available, and these are continuing to expand.
- Unless your individual state has changed their rules from the federal laws (like Kansas), all funds remaining in an ABLE account when the beneficiary passes, are subject to Medicaid payback if a state elects to assert the reimbursement claim.
- ABLE accounts are continuing to add flexible features for the disabled beneficiary that make them more and more practical for the life needs of the beneficiary.
It’s Important to Understand the Pros and Cons
Even with limitations, ABLE accounts have been a wonderfully positive development for people living with disabilities, but they are by no means a singularly comprehensive savings tool.
For instance, as a positive for ABLE accounts: ABLE accounts provide for tax-free growth of assets, and as long as distribution is used for qualified disability expenses, taxes will not be applied to asset growth. This tax-advantaged benefit can be significant over time, and should not be underrated.
Additionally, ABLE accounts may have more flexibility with distributions for food and shelter than a beneficiary may experience with an SNT.
So you can see how a wise family could learn to leverage the ABLE account with a Special Needs Trust to optimize their planning.
Both ABLE accounts and Special Needs Trusts play an important role in providing for those with disabilities. Understanding the pros and cons of each is a very important part of the overall planning for families with special needs.
Speaking With an Experienced Special Needs Planner Can Be Very Beneficial
Because the regulations governing the two tools are quite different, families and individuals with disabilities can really benefit from speaking with an experienced special needs planner who can take into consideration the unique circumstances of their one-of-a-kind family.
Additionally, the financial advisor who understands ABLE accounts and SNTs is usually better prepared to provide top quality financial planning and investment recommendations for the family with special needs.
Finally, certain family situations (i.e. a working disabled beneficiary or a divorced family situation) can be more advantageous for using ABLE accounts, so education around the use of ABLE accounts and Special Needs Trusts can be very valuable.
As always, we at The Bell Law Firm are more than happy to help you with any special needs planning issues you may have. If you have questions or concerns about which tool may be best for your loved one, please give us a call at 913-345-2323. We will be happy to speak with you!