Special Needs Trusts and ABLE Accounts: A Comparison

Nicholas Stratton
January 26, 2023

People with disabilities can save money tax-free through special needs trusts (SNT) and Achieving a Better Life Experience accounts (ABLE). Both options provide a mechanism for saving money and protecting resources that ensures the person with a disability (PWD) continues their eligibility for public benefits programs. Accumulating resources for the benefit of a PWD without jeopardizing key government benefits like Supplemental Security Income (SSI) and Medicaid can reduce monetary pressures and greatly enhance the lives of those with disabilities.

Deciding if a Special Needs Trust or ABLE Account is Best

There are significant differences between the saving rules of an ABLE account and SNT (also known as a supplemental needs trust), as well as different rules regarding the use of the savings. There are also different annual limits on the amount you can save. Your circumstances can directly impact each saving strategy type, and understanding how to set up and manage the best option for you is crucial. A special needs attorney or disability attorney can explain whether one or the other or both account types can work for your situation.

ABLE accounts tend to be easier to create and manage, yet they have some disadvantages. One of which is the limit on the contribution you can make annually. A special needs trust has no contribution limits but can be expensive to create and typically more complex to manage. The advantage of having both is an ABLE account can cover everyday expenses while an SNT can cover those larger purchases not covered by public benefits.

Third-Party Special or Supplemental Needs Trust (SNT)

For persons with disabilities, most assistance programs have asset and income restrictions. If a PWD has too much money in their savings or earns too much money, they will lose eligibility for these benefits. Using an SNT allows a workaround for these restrictions. The money put into the trust won’t count toward the eligibility qualification for public assistance. It is permissible for family and friends to contribute financially to the beneficiary’s SNT. However, if the PWD can financially contribute to a trust for themselves, the special needs lawyer will create a First-Party SNT (Self-Settled SNT).

A special needs trust is a legal arrangement and a fiduciary relationship with a person or entity acting on behalf of another to manage these assets. Establishing an SNT can benefit both parties beyond the protection of income-restricted benefits programs. The creator of the trust, called the grantor, has some reassurance that trust proceeds will go to the expenses as stipulated. Creditors and legal judgments can’t seize the trust assets as an SNT is irrevocable.

However, the money in an SNT can only fund a limited range of expenses. A special needs lawyer or disability attorney can make clear that the expenditures from the SNT won’t conflict with government eligibility regulations for benefits programs. These funds may not cover basic living expenses but can pay for the following:

  • Medical equipment and medication that Medicare does not cover
  • Insurance premiums (health, dental, life, etc.)
  • Therapy or rehabilitation services
  • Caretaker or personal assistance payments
  • Legal or guardianship expenses
  • Education (school) and job training
  • Home renovations that improve safety and accessibility
  • Case management or private counseling
  • Recreation or entertainment tickets
  • Home appliances, electronic equipment, and furniture
  • Clothing
  • School or camp tuition
  • Telephone service and internet access
  • Transportation, including a vehicle, ride share, or bus/rail pass
  • Travel/vacation (including the cost of a companion)
  • Funeral and burial expenses

The list excludes food such as groceries or restaurant meals, rent or mortgage payments, property taxes, homeowners insurance dues, homeowners insurance, and utilities like gas, electricity, and water.

Achieving a Better Life Experience account (ABLE)

This account type still provides a tax advantage for a PWD but is only available to persons with significant disabilities appearing before age 26. It is permissible for friends, family members, and the beneficiary to contribute to the account. The money accrued in an ABLE account won’t affect a person’s eligibility for public benefits programs.

While the ABLE account contributions are not tax-deductible, the funds that grow within the account are tax-free, as are their distributions. An ABLE account is a newer financial product in comparison to an SNT. The goal of its creation in 2014 was to give more people with disabilities access to more benefits that, up until then, were only available to those with a special needs trust. Additionally, the monies in ABLE accounts can pay for a wider range of costs than an SNT. These expenses are known as Qualified Disability Expenses (QDEs). Funds in an ABLE account can cover expenses, including:

  • Housing
  • Transportation
  • Education
  • Employment training and support
  • Assistive technology and its related services
  • Personal support services
  • Prevention and wellness
  • Health
  • Legal fees
  • Financial management and administrative services
  • Basic living expenses
  • Expenses for ABLE account monitoring and oversight
  • Funeral and burial expenses

There are three key differences between SNTs and ABLE accounts: eligibility, allowable expenses in each account type, and limits on the money you can save.

Eligibility

ABLE accounts are only available to persons with a disability onset before age 26 as determined by the Social Security Administration’s criteria. There are no age limits in creating a third-party SNT, but funding can’t include the beneficiary. A first-party SNT is self-funded by the person with a disability but must be created before the PWD reaches age 65.

Allowable Expenses

An SNT’s design is to pay for extra things that make life more comfortable, like vacations, pets, home furnishings, entertainment, etc. An SNT paying for basic living costs may reduce a person’s public benefits. ABLE account allowable expenses have a broader range. Anything that helps a PWD improve their independence, health, or quality of life is acceptable. QDEs can include basic living costs such as education, food, employment, technology, and more.

Account Limits

ABLE accounts have amount and contribution limits. Contribution amounts are finite for each year and are under federal tax code governance. Additionally, ABLE accounts have a maximum limit set by the states that manage them. Many states have a maximum limit set above $300,000, with only the first $100,000 exempt from impacting eligibility for Supplemental Security Income. A special needs trust has no such limits; however, they can be more expensive to create.

Every family has different needs and circumstances when assessing whether an SNT or ABLE account (or both) is the better option for their loved one with disabilities. It is best to use each option for different purposes despite having some common characteristics. The main reason to create an SNT is if there is substantial money, more than allowable in an ABLE account, to fund the trust without affecting public benefits or if you want to fund more than an annual ABLE account maximum. A special needs lawyer or disability attorney law can assess your financial situation and the needs of your loved one with disabilities to find the right solution.

We hope you found this article helpful. Please contact our New Jersey office or call us at (201) 464-2040 and schedule a consultation to discuss your legal matters. We look forward to the opportunity to work with you.

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