Special Needs Trust vs. ABLE Account

At the end of 2014, the Achieving a Better Life Experience (ABLE) Act became law in the United States, allowing people with disabilities to create ABLE accounts.

ABLE accounts allow a person who became disabled before age 26 to create a special bank account.  Money in the account is not counted towards Medicaid and SSI resource limits, and won’t disqualify the owner from receiving these benefits.  The money has to be used to pay for “qualified disability expenses” such as education and transportation.

ABLE accounts serve a similar function to special needs trusts, but do not replace them, for two important reasons.

First, an ABLE account can’t hold more than $100,000 without affecting Medicaid and SSI eligibility.  There is also an annual limit on how much you can contribute to an ABLE account, equal to the federal gift tax exclusion (which is $14,000 in 2015).   A special needs trust is usually used for lump sum payments, such as an inheritance or a lawsuit settlement.  With the $14,000 annual contribution limit, an ABLE Account wouldn’t be able to accept a sizable inheritance or settlement, so unless the remainder of the funds were held in a special needs trust, the person with disabilities would lose his benefits.  (There also is no restriction on how a special needs trust must be spent, while an ABLE account must be spent on qualified disability expenses.)

Second and more importantly, ABLE accounts involve a trap for the unwary.  An ABLE account must repay Medicaid for assistance on the disabled person’s death, and then pay the remainder to the state.  So if any money is left in the ABLE account when the owner dies, it has to go to the government instead of the owner’s family.  By contrast, a third-party special needs trust need not repay Medicaid, and the remainder can be left to other family members.  A third-party trust is typically used for gifts or an inheritance, so if you intend to leave money to your child that may last beyond his lifetime, it should be held in a special needs trust and not an ABLE account.

ABLE accounts are a welcome development, and very useful for certain things.  ABLE accounts can be great to hold modest payments, such as small gifts from family or income from part-time work.  But ABLE accounts do not replace special needs trusts.

Congress Passes ABLE Act for People with Disabilities

Congress Passes ABLE Act for People with Special Needs

The Senate just passed the Achieving a Better Life Experience (ABLE) Act. The House had previously passed the bill, and it will likely be signed by President Obama and become law.

ABLE creates a new way for people with disabilities to save and manage money. Under the act, a person who became disabled before age 26 can create an “ABLE” bank account and have up to $100,000 in it without losing eligibility for SSI and Medicaid.

Reportedly, contributions to an ABLE account will be limited to the federal gift tax exclusion amount, which in 2014 is $14,000.

ABLE account funds can be used to pay for “qualified disability expenses”, which according to the congressional summary includes “expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.”

If an ABLE account is used to pay for anything other than qualified disability expenses, a 10% penalty tax is imposed.

ABLE accounts will likely be an excellent new tool for people with disabilities and their families to manage finances. However, ABLE won’t replace special needs trust (SNT’s), because of key differences between the two.

ABLE and SNT’s both allow a person with disabilities to qualify for means-tested benefits like SSI and Medicaid, while money is set aside to meet that person’s special needs. However, unlike ABLE an SNT has no limit on contributions or the amount held. The most typical situations where someone needs an SNT involve either an inheritance or a personal injury settlement – lump sum payments.  These payments would conflict with ABLE’s $14,000 annual contribution limit, especially if money has already been contributed to the account that year.  They may also conflict with ABLE’s $100,000 total limit.

SNT’s also have a much higher age limit (65 for first-party SNT’s; no limit for third-party SNT’s), allowing more people to use SNT’s.  And SNT’s can be written to provide more flexibility in what the trust can pay for.

Where ABLE might be very helpful is if someone receives a small lump-sum payment, e.g., under $10,000 – a graduation gift from family, for example, or a small lawsuit recovery. ABLE would be perfect for such a payment. Also, while it’s unclear now what the final rules will be regarding ABLE, it may be great for someone with disabilities who works part-time and receives modest income. The income could be deposited into an ABLE account, with no disruption of benefits.

All in all, ABLE is a boon to people with special needs, and we at FriedmanLaw look forward to using it to better serve our clients.

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