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Special Needs Planning Newsletter: ABLE Account or Special Needs Trust – Which One Is Best?

03.06.2019

Saving money for a loved one with a disability can be challenging because of the $2,000 resource limit for eligibility for means-tested governmental benefits like Supplemental Security Income (SSI) and Medicaid. In the past, a special needs trust, sometimes called a supplemental needs trust ("SNT") was the most common way to save money without jeopardizing benefits. The passage of the Achieving a Better Life Experience Act (ABLE) in 2014 created another option for saving – the ABLE account. 

What is the difference between an ABLE account and a SNT?

An ABLE account is a tax-advantaged savings account that can be established for an individual with a disability, so long as the person had the disability before age 26. The account can be set up by the person with a disability (the account beneficiary) or his or her parent, legal guardian, or agent under a power of attorney.   

A SNT is a trust that allows a person with a disability use of the property held in the trust without being disqualified for needs-based government benefits. A trustee controls the assets and uses them to supplement government benefits. A first party SNT can be established by the beneficiary, parents, grandparents, or by court order. A third party SNT can be established by anyone other than the beneficiary. 

How can the funds in an ABLE account be used?

An ABLE account can be used to pay "Qualified Disability Expenses" (QDEs) like basic living expenses, education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative expenses, and legal fees. Withdrawals for expenses other than QDEs may be taxable and subject to penalties. 

How can the funds in a SNT be used?

The funds in a SNT can be used to pay for anything that benefits the beneficiary alone, other than food or housing, without affecting government benefits. If the beneficiary is an SSI recipient, payment of food and housing expenses can reduce benefits. 

What are the advantages of an ABLE account?

  • Protects eligibility for government benefits so long as the account value is less than $100,000 
  • Money grows tax-free, and qualified distributions are not considered income
  • Inexpensive to set up and maintain
  • Can be used to pay housing expenses without affecting SSI

What are the disadvantages of an ABLE account?

  • Annual contributions are limited to a total of $15,000 for all contributors
  • Any amount over $100,000 in an ABLE account counts toward the $2,000 resource limit for SSI/Medicaid eligibility  
  • A beneficiary is only allowed one ABLE account
  • Investment options are limited because each state's program chooses the investment options and investment changes can't be made more than twice a year  
  • All funds in an ABLE account, even funds contributed by third parties, are subject to Medicaid payback at beneficiary's death

What are the advantages of a SNT?

  • Protects eligibility for government benefits even if the total value is more than $100,000 
  • No limit on the amount that can be contributed or on the total value of SNT
  • No limit on the number of SNTs a beneficiary can have
  • Investment options are flexible because the trustee chooses the investments and can change investments at any time 
  • Allows family members to gift assets or leave inheritance or life insurance to a person with a disability without disqualifying him or her from government benefits 
  • No Medicaid payback at the beneficiary's death for a Third Party SNT 

What are the disadvantages of a SNT?

  • A trust is a taxable entity, taxed at trust rates, which are currently higher than personal income tax rates 
  • May be expensive to create and administer 
  • Funds remaining in a First Party SNT are subject to Medicaid payback at the beneficiary's death 

When is an ABLE account useful? 

  • A person with a disability earns income that may accumulate to more than $2,000
  • A person with a disability previously received gifts that are limiting his or her ability to qualify for benefits
  • A person with a disability receives a small gift, inheritance, or other cash
  • Loved ones want to make small gifts to a person with a disability
  • Cost of setup and maintenance is a concern

When is a SNT useful? 

  • A person with a disability is receiving or may receive significant funds (more than $15,000) from a third party 
  • Someone plans to leave an inheritance for a person with a disability 
  • When someone develops a disability after age 26 
  • A caregiver desires more control and flexibility for investments 

We realize this can be a lot to take in. As you can see, there are several pros and cons to ABLE accounts and special needs trusts. The best solution will always be the one that is customized to fit the family's needs based on their own unique situation. Our team has helped hundreds of clients with these special needs planning tools, and we take a holistic approach to finding a solution tailored to fit your needs

If you have questions about special needs planning or whether an ABLE account or SNT is right for you or your loved one, please contact us.