ABLE Accounts vs. Special Needs Trusts: Why Not Have It All?

If you have a child with disabilities, it is crucial to set money aside for the child’s future. At the same time, you need to consider your child’s access to public benefit programs such as Medicaid and Supplemental Security Income (SSI), as well as the state and federal tax implications.

The two major vehicles to accomplish these goals, ABLE accounts and special needs trusts (SNTs), each have their advantages and limitations. Using them in tandem may be the optimal strategy for your child with special needs.  

Achieving a Better Life Experience (ABLE): Pros and Cons

Patterned on Section 529 college savings accounts, ABLE accounts offer a tax-advantaged way for people with disabilities to put money aside in excess of the SSI program’s $2,000 resource cap without compromising their eligibility for government benefits like SSI and Medicaid.

Assets are allowed to grow, tax-free, inside the account, and withdrawals are not taxed so long as the money is spent on qualified disability expenses (QDEs) such as transportation, assistive technology, health and wellness, and employment support.

And, unlike a special needs trust, which leaves the account under the control of an assigned trustee, an ABLE account can be managed and controlled by the beneficiary once she comes of age. Being able to spend money without having to obtain a trustee’s permission translates into welcome financial independence for a person with a disability.

ABLE accounts are easy and inexpensive to set up. Almost all states now have ABLE programs, and if yours doesn’t, you can set up an account using the program in another state that accepts out-of-state account holders. Check out a directory of ABLE account programs by state.

However, ABLE accounts have several serious drawbacks and limitations:

• The beneficiary with special needs is the owner of the assets but may lack the capacity to manage the money responsibly. The parents can petition to take on this role, but if they die before the beneficiary, the account would have to be managed through guardianship or conservatorship, which can be cumbersome. Alternatively, the Social Security Administration (SSA)-appointed Representative Payee can manage the account.
• Perhaps the most significant drawback to an ABLE account is that the beneficiary must have become disabled before the age of 26 to qualify.
• Also, the beneficiary can only have one account and if its value exceeds $100,000, any benefit from the SSI program is suspended automatically. (Medicaid eligibility is not affected until the account’s value meets the state’s 529 account threshold. For example, California’s is $529,000).
• Annual contributions are limited to $17,000 (in 2023), as aligned with the federal gift tax exclusion.
• Lastly, most states that administer ABLE programs have a Medicaid payback provision upon the death of the beneficiary. This means the state can claim reimbursement, dollar for dollar, for any Medicaid funds that went to the beneficiary during his lifetime, if any money remains in the ABLE account.

Special Needs Trusts (SNTs): Pros and Cons

An SNT can be a way around these limitations. Unlike ABLE accounts, there is no limit to the size of the trust, and the funds can be used for almost anything a beneficiary needs to supplement her government benefits. Annual contributions are not limited as they are for ABLE accounts. Because the trust, and not the person with special needs, owns the assets, it is not counted against the beneficiary’s financial eligibility for SSI or Medicaid. Upon the beneficiary's death, the assets in a third-party SNT can pass to the donor's other relatives or anywhere else and are not subject to the state’s Medicaid payback provision (assets in a first-party SNT, which holds the beneficiary’s own assets, are subject to payback).

On the downside, setting up a trust may require the services of an attorney, which will cost more than opening an ABLE account. And, as noted earlier, trust distributions are controlled by the trustee, not the beneficiary. 

Also, third-party SNTs do not enjoy the same tax benefits as ABLE accounts. Income over $4,300 is taxed at the highest rate (37 percent) for federal taxes, and state taxes may be due as well, although deductions apply that can lower this rate to the beneficiary’s tax rate. Assets within the trust do not grow tax-free over time, but are subject to capital gains taxes, and these can be considerable. Because the property originally belonged to an owner other than the primary beneficiary with special needs, capital gains are assessed when the assets were originally purchased, perhaps at a very low cost if they were held over a long period of time.

You Can Have It All

The best solution is to use both. The ABLE account can be funded over time from the SNT, giving the person with a disability who has capacity the ability to manage his or her own assets up to $100,000. This approach offers the best of both worlds: ensuring that the person with a disability is able to manage significantly more money in an ABLE account while at the same time preserving public benefits and having assistance in managing an entire inheritance in the SNT.  

Connect with a qualified special needs planner near you to devise the strategy that works best for your family.