ABLE Account or Special Needs Trust: Key Considerations for Fiduciaries
Note: this article is not intended to provide investment, legal, tax, or accounting advice. Before making decisions with investing, legal, tax, or accounting ramiﬁcations, you should consult appropriate professionals for advice that is speciﬁc to your situation.
For decades, professionals serving people with disabilities have turned to Special Needs Trusts to help their clients save money and help protect benefits eligibility. More recently, ABLE Accounts were introduced as a new savings option when the Achieving a Better Life Experience (ABLE) Act allowed states to create tax-advantaged savings programs for eligible people with disabilities.
While many individuals are already using ABLE Accounts, the program could be serving millions more. Of the 8 million people estimated to be eligible, only approximately 100,000, or 1% of those eligible, have opened accounts. So how do you decide whether someone is a good fit for an SNT or an ABLE Account? Here are some key considerations to keep in mind.
Who is eligible:
Currently, ABLE Accounts are limited to individuals who experienced the onset of their disability prior to age 26 (Note: Legislation has been introduced to increase this limit to 46), while SNTs are less age-restrictive. First-party SNTs funded with the beneficiary’s assets must generally be established before the individual reaches the age of 65, and third-party trusts funded by non-beneficiary assets do not carry an age restriction. Typically, SNTs and ABLE accounts require that the beneficiary meets the disability requirements for Supplemental Security Income (SSI) or Social Security disability benefits.
Options for more independence:
SNTs are a legal arrangement where a trustee manages assets on behalf of a beneficiary, and these trusts must be managed by someone other than the individual with a disability. However, with ABLE accounts, a beneficiary can manage their own account (or it can be managed by an authorized representative). For people with disabilities, managing their own ABLE Account can provide a higher degree of financial independence and empowerment than they have been able to experience before.
How contributions are made:
Like with SNTs, amounts in ABLE accounts are disregarded when determining eligibility for means-tested federal programs. This is true for ABLE Accounts as long as the balance doesn’t exceed $100,000, but there is no limit on the balance of SNT assets. Contributions can be made by any “person” (including trusts and SNTs), but the total annual contributions are limited to the annual federal gift tax exclusion (currently $16,000 for 2022). These limits are distinct from Special Needs Trusts which do not have caps on how much can be contributed.
Paying for food and housing:
An SNT can be used to cover many types of expenses for the beneficiary, but when distributions are used for food or housing expenditures, the SSA may reduce the beneficiary’s Supplemental Security Income (SSI) for in-kind support and maintenance (“ISM”) benefits. This is not the case for ABLE Accounts – food is considered a Qualified Disability Expense (“QDE”) in the POMS (POMS are the guidelines for SSI) and many housing expenses can be paid for with an ABLE Account
Possible tax implications:
ABLE Accounts are considered “tax-advantaged” accounts because income generated from contributions to the account (dividends, capital gains, etc.) are not taxed, as long as funds are used for QDEs. This is different from SNTs where income generated by the trust is taxable. Some states also allow residents a tax credit or deduction for ABLE contributions. However, in both the case of ABLE Accounts and SNTs, contributions are made with after-tax dollars. Additionally, ABLE accounts may only be funded with “cash” (e.g., no appreciated stocks, etc.), while SNTs can be funded with a variety of assets including cash, stock, bonds, and real estate.
But what’s right for your client?
The good news is that you may not have to choose. Many beneficiaries with ABLE Accounts also have an SNT, whether first-party, third-party, or within a pool. The additional spending flexibility and beneficiary empowerment that can come with an ABLE Account makes it a worthwhile tool to consider for individuals with disabilities. If you are considering opening an SNT or ABLE Account, you should consult a special needs planning attorney or Elder Law attorney to discuss which of these options is best for the beneficiary’s needs – the right choice might be both.