Financial Tools for Those with Disabilities: ABLE Accounts and Special Needs Trusts

With the multitude of physical, emotional, and logistical challenges that accompany living with a disability, the addition of financial stress can be overwhelming. That frustration compounds when common financial planning assumptions – such as consistent, long-term income growth, medical expense projections, or even life expectancy – may fail to apply in the face of impairment. Unique circumstances require unique planning solutions and proactive management of the financial levers within your control. Working with a team that understands the options specifically designed to support individuals with disabilities creates peace of mind and confidence moving forward. Two account types available to those with disabilities are ABLE accounts and Special Needs Trusts (SNTs). 

ABLE ACCOUNTS

Created through the Achieving a Better Life Experience (ABLE) Act of 2014, ABLE accounts are savings vehicles designed to ease the financial burden of a disability without disrupting eligibility or receipt of means-tested benefits, such as Supplemental Security Income (SSI). ABLE accounts offer significant autonomy and opportunity to account holders by providing the means to accumulate savings in a setting that (1) is excluded from countable resources used in means-testing calculations, (2) permits the tax-free growth and distribution of funds for qualified expenses, and (3) is easily accessible.

Eligibility

To create an account, the owner must meet requirements set by the Internal Revenue Code (IRC), including but not limited to:*

1.  Texas Residency;
2. Onset of Disability Prior to Age 46; and 
3. Possession of a Condition That Satisfies One of the Following:
   1. Eligible for or Currently Receiving SSI or SSDI;
   2. Physician Signed Disability Certification; or 
   3. An SSA Compassionate Allowance Condition

*To confirm eligibility for yourself or a loved one, please reference HERE

If the qualifying individual is unable to open the account on their own, a Person with Signatory Authority (PSA) such as a parent or an individual with power of attorney (POA) may open and operate it on their behalf.

Funding and Benefits Impact

Owners of an ABLE account may contribute or receive contributions of up to $20,000 annually until the account balance reaches $500,000 or higher. Because SSI restricts benefit recipients to $2,000 in countable resources, the ability to save such significant funds outside of that calculation is monumental for financial flexibility. Account contributions may come from the owner, family members, friends, or other interested parties at any time. However, it is important for contributors to note that additions to the account are not tax-deductible and may only be distributed for qualified expenses.

One significant drawback of an ABLE account is that, though the owner may save upwards of $500,000, only $100,000 is excluded from means analyses for FAFSA, SSI Medicaid, SNAP, or HUD. Balances above that value will have a negative impact on benefit eligibility. For this reason, it is critical to analyze the balance and advantages of your ABLE account in the context of other benefits offered or received.

Qualified Expenses

Because of the limitless variation in the means and intensity of support needed for disabilities, the parameters of qualified expenses are broad in nature. Acceptable expenses must simply assist or improve the “health, independence, or quality of life” of the owner. Examples of qualified expenses include housing costs, transportation, education for employment, healthcare, or fees for financial or legal services. In the unfortunate event that the owner passes, funds may also cover funeral expenses, burial costs, or reimbursement of Medicaid payments made. Unlike special needs trusts, which are described below, ABLE accounts allow owners to manage and access funds immediately, at their discretion, and without concern for significant expenditure scrutiny.

Special Needs Trusts

Though ABLE accounts excel in their flexibility and advantaged tax status, the account maximums do little to provide long-term protection of wealth. When managing substantial amounts, such as sums from a legal settlement or an inheritance, Special Needs Trusts are a more well-suited financial tool. SNTs provide additional structure, safeguards, and higher account balance options due to their status as a legal trust with a sole beneficiary and a trustee to oversee the administration and distribution of funds.

Eligibility and Funding

For a special needs trust to be created, the beneficiary must at least meet the disability requirements set forth by the Social Security Administration (SSA). However, the exact requirements depend on the type of SNT being created.

The SNT that would serve you best depends primarily on the original ownership of the funds in question. First-Party, or self-settled, SNTs are created using assets owned by the beneficiary. In contrast, Third-Party SNTs are established for the benefit of the disabled individual using funds owned by a third-party, such as parents, grandparents, or other family members. Because both categories possess specific strengths, limitations, and requirements, it is imperative that you speak to a qualified attorney when considering or creating a Special Needs Trust.

Distributions

Because the trust and trustee remove the beneficiary’s ability to own or control the funds, assets held in an SNT are excluded from calculations for means-tested benefits, just like ABLE accounts. This characteristic, coupled with the lack of account balance limits, makes SNTs an attractive option. However, all account types come with a downside. For SNTs, these drawbacks typically include taxable gains, heightened administrative regulation, and significant scrutiny applied to the distribution of funds.

Depending on the specific type and language of a Special needs trust, the improper use of funds could result in (1) the assets being recharacterized as a countable resource for benefits, or (2) the distributions getting taxed as ordinary income. Such results could potentially negate any benefits the trust offers. This risk highlights the critical necessity of a watchful and attentive trustee. Typically, trustees mitigate this by making distributions that are supplemental to SSI benefit coverage. Before pursuing the creation of a trust or naming a trustee, it is important to speak to a qualified attorney about the specific benefits, risks, and responsibilities applicable to your situation.

ABLE Accounts vs. SNTs

Clients often attempt to compare ABLE accounts, First-Party SNTs, and Third-Party SNTs to decide which one is the best option to pursue. In reality, the optimal scenario may involve one, two, or all three types of accounts based on the individual’s capacity, needs, resources, and support system. When used in conjunction, the flexibility of ABLE accounts combined with the wealth protection of First-Party SNTs and estate planning efficiencies of Third-Party SNTs can create a frictionless financial environment that not only maximizes your financial situation, but also your peace of mind. Where common assumptions fail, creative solutions and strategic account coordination can help those with disabilities thrive. Speak to an advisor today to find out more about if one – or all – of these solutions could be beneficial for you or a loved one.