Those who have loved ones with disabilities and wish to save money tax-free often create special needs trusts (SNTs) to supplement their loved one’s unique needs and quality of life while continuing to qualify for public assistance. With the ABLE Act (Achieving a Better Life Experience) of 2014, disabled individuals now have a second means of building assets while at the same time not jeopardizing federally funded programs such as Medicaid and Supplemental Security Income (SSI) or Social Security Disability Income (SSDI). For more information, speak with a qualified estate planning lawyer today.
Differences Between ABLE Accounts and Special Needs Trusts
Which financial strategy is better? The answer is, it depends. There are some significant differences between them regarding saving and spending rules. ABLE accounts and special needs trusts have different annual saving limitations. Depending on your circumstances, you might use both financial products. However, only one ABLE account is permissible for each disabled individual.
While an ABLE account is easier to set up and manage, its primary disadvantage is contribution limits. The total annual contribution possible by a participating account funder is $16,000. Each state has an ABLE limit ranging from $235,000 to $500,000. Persons with disabilities who receive SSI are also subject to additional limitations. A special needs trust has no monetary limits; however, it is more complex to set up and manage. Some families set up an ABLE account for everyday expenditures and maintain an SNT for larger purchases.
Similarities Between ABLE Accounts and Special Needs Trusts
An ABLE account has some similarities to an SNT as both are tax-advantaged savings vehicles for individuals with disabilities before the age of 26. The beneficiary, family, and friends can all contribute to the account, and neither an ABLE account nor SNT affects public benefits eligibility. For the beneficiary, funds within both financial products grow and distribute tax-free.
But, an ABLE account has more purchase options than an SNT. Qualified Disability Expenses (QDEs) include:
- Employment training and support
- Health prevention and wellness
- Assistive technology and personal support services
- Financial management and administrative services
- ABLE account expenses for oversight and monitoring
- Legal fees
- Funeral and burial
- And more
In contrast, an SNT design is to pay for “extras” to make life more comfortable. Extras may include:
- Home Furnishings
- Assistive technology
- Therapies Medicaid doesn’t cover
This narrower range of permitted expenses is why families will often establish both financial vehicles.
Different Types of Special Needs Trusts in Houston
There are three kinds of special needs trusts in Houston. The first one is a third-party special needs trust. It is a good idea for parents to create a third-party trust for their child as soon as they know the child’s disability. Once a third-party special needs trust is established, other family members may be able to contribute to the trust. The person who sets up the third-party trust (usually the grandparent or parent) can decide what happens to the money if the beneficiary passes away before the trust is used up or if the money in the trust runs out.
The second type of special needs trust is a first-party trust. In this type of special needs trust, beneficiaries can receive money in cash but can lose all their government benefits if the money is not put into special needs trusts. First-party trusts also have payback provisions. This means that Medicaid needs to be paid back for everything it spent on the beneficiary before the leftover funds get divided among other beneficiaries.
The third alternative is a pooled trust. A pooled trust is used when there are small amounts of money for a person under the age of 65. For example, if a beneficiary receives $25,000, they may use a pooled trust because they do not really need a full-blown special needs trust. Texas has the Arc of Texas which functions as a pooled trust. The Arc of Texas manages small amounts of money and is usually used as if it is a special needs trust.
Accessing Funds, Taxes, and Expenses
Money in an ABLE account is easy to access. Many programs offer a debit card linked to the account so you can pay for items directly. In an SNT, the trustee needs to make the funds available to the beneficiary. This oversight by a trustee ensures the beneficiary must get permission before using a credit or debit card to purchase items or obtain cash that may not qualify for the SNT rules. A newer option for an SNT is a True Link debit card, a trustee-managed prepaid card. Still, purchases must not disqualify the beneficiary from government benefits programs.
The person with disabilities conducts ABLE account ownership and management. Since the money in an ABLE account is tax-free, management is quite simple. However, they must ensure their expenditures qualify as a QDE. The trustee of the SNT is responsible for following the trust guidelines, keeping records of expenses, and producing tax information annually as the trust grantor pays taxes. When the person who owns an ABLE account dies, the money left is likely to be used for state Medicaid agency services reimbursement. A special needs trust is created with other people’s money (parent, grandparent), and as a third-party trust does not have to repay Medicaid after the beneficiary dies.
Every family has different circumstances and needs. A special needs trust attorney can explain the varied purposes of an ABLE account or SNT and how they can benefit your loved one. It may be that both financial products suit your planning needs to protect a loved one with a disability.
We hope you found this article helpful. Please contact our Houston office at (281) 214-0173 or the Bay City office at (979) 318-5079 today and schedule an appointment to discuss how we can help you with your legal matters.