A question that I have been asked a lot recently by parents who have children with special needs is: is an ABLE Account or a Special Needs Trust the right planning solution for me. The answer is always dependent on the circumstances. In order to make the right determination for you, it is important to understand both, and dissect the common pros and cons of both options.
ABLE Account
Able accounts are accounts with tax-advantaged savings (similar to a 529 plan) for individuals with disabilities with an age of onset before turning 26 years of age. They were created as a result of the passage of the “Achieving a Better Life Experience Act” of 2014, which was then signed into law in NJ by then Governor Chris Christie in 2016. Each disabled individual may only have one ABLE account, and that account has a contribution limit of $15,000.00 per year (to be adjusted with the gift-tax exclusion) and a resource limit of $100,000.00 (i.e. all funds exceeding $100,000.00 will be counted as an asset to the disabled individual). These accounts can be used for “qualified disability expenses” which are expenses related to the disability or for the benefit of the individual with the disability, including: education, housing, transportation, employment training, health, prevention and wellness, funeral and burial, and basic living expenses, etc. Upon the death of the disabled beneficiary, funds remaining in the ABLE account must first be used to reimburse the state for medical assistance benefits received (i.e. monies paid by Medicaid).
Special Needs Trust
There are three main types of Special Needs Trusts:
- A First-Party Trust is most often established under 42 U.S.C. §1396p(d)(4)(A), and is referred to as a “(d)(4)(A) Trust.” This type of trust is established with the assets of the person with a disability. There are specific state and federal criteria that must be followed, and if drafted incorrectly, will affect eligibility. For example, these trusts must have a payback provision, meaning that on the death of the individual, assets remaining in the trust must be used to pay back to the state for benefits paid on his or her behalf.
- A Third-Party Special Needs Trust is created with the assets of another individual. These trusts are funded with the assets of a third party for the benefit of the individual. Typically, you see these trusts established by the parents of the beneficiary. Having a third-party trust available allows family members to provide for the beneficiary in their respective wills without leaving money outright. Unlike the First-Party Trust, traditional Third-Part Trusts do not have a payback provision. The exception to this rule is when a Third-Party trust is established so that the grantor can obtain Medicaid benefits him or herself. This type of trust referred to as a Sole Benefit Trust has its own state and federal criteria that must be followed.
- A Pooled Trust is one that is administered by a nonprofit organization, such as PLAN/NJ. Pooled Trusts are a way to provide the advantages of a Special Needs Trust without having to actually establish a separate trust. Assets are placed in sub-accounts within the pooled trust to be used for the named individual but pooled together for investment purposes.
Some Pros and Cons of ABLE Accounts v. Special Needs Trusts (SNT)
Pro: A disabled individual may establish their own ABLE Account or First-Party SNT with their own money.
Con: ABLE accounts can only be established by individuals who became disabled before the age of 26, while age does not matter in the case of SNT’s.
Pro: A disabled individual can manage their own ABLE funds and access them when necessary, which they cannot do with any type of SNT.
Con: Trustees of an SNT can ensure that funds are being spent properly and for the benefit of the disabled individual.
Pro: Funds in an ABLE account can grow tax-free, while funds in an SNT will be taxed if there is enough income.
Con: ABLE accounts are limited to annual contributions of $15,000.00 (with a maximum balance of $100,000.00), while SNT’s have no limit.
Pro: ABLE accounts are easy to establish and carry minimal fees as opposed to SNT’s, which can be expensive.
Con: If a third party leaves money to an ABLE account, that money will go to reimburse the state first after the individual passes. If a third-party puts money into a third-party SNT, the state will not be reimbursed from the remaining funds.