Is ABLE Account the Same as Special Needs Trust?
Many families help their disabled loved ones with whatever resources they have, if they can, but this must be done carefully to protect eligibility for government aid, reports a recent article titled “Here’s how ABLE accounts, special needs trust differ…and how they can work together” from CNBC. An ABLE account—named for the Achieving a Better Life Experience Act—can be paired with Special Needs Trusts to improve the quality of life for the disabled family member.
How do Special Needs Trusts work?
The two types of Special Needs Trusts are known as First-Party Special Needs Trusts and Third Party Special Needs Trusts.
A First Party Trust is created with the disabled individual’s own funds and is used to shelter any income, earned or inherited, to maintain their eligibility for Medicaid, which has both income and asset limits. Any distributions from the First Party Trust must be approved by the trustee. After the death of the disabled individual, Medicaid will make a claim against any funds in the First Party Trust to the extent of funds expended by Medicaid on behalf of the disabled individual.
In contrast, the Third-Party Trust is funded by parents or others and are only for the disabled person’s needs (not the disabled person’s own funds). After the disabled person passes, the funds are allowed to go to someone else in the family (not Medicaid). Obviously, a Third Party Trust is preferred to a First Party Trust. That is why parents who have disabled persons on Medicaid should think twice about bequests directly to the disabled person. Doning that will either (1) kick the disabled person off of Medicaid; or (2) Medicaid will allow the disabled person to stay on Medicaid at the cost of putting the disabled person’s property in a First Party Trust (over which Medicaid is the remainder beneficiary).
Special Needs Trusts (SNTs) may not be used for certain expenses paid for by government programs, including groceries, medical expenses covered by Medicaid and housing expenses, which are covered by Supplemental Security Income (SSI).
Expenses not covered by government programs can also be paid from ABLE Accounts. The ABLE account is a tax-advantaged saving account similar to the 529 accounts used for college savings. Funds may be used for expenses that maintain or improve the individual’s health, independence, or quality of life. Funds can be used for education, recreation, personal technology and more. They are treated much like First Party Trusts in that Medicaid can clawback funds from the ABLE account after the death of the recipient.
There are requirements and limitations to the ABLE account. In 2022, only $16,000 may be contributed per year. Most parents leave more than this amount for their disabled children, so a different vehicle is needed for inheritance.
Here’s where it gets interesting: A trustee for a SNT can make a distribution to the ABLE account to help cover expenses not permitted to be paid from the Trust.
An estate planning attorney can help the family plan for the present and the future to use these and other strategic planning tools for a disabled individual.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
If you liked this article, “Is ABLE Account the Same as Special Needs Trust?” read also these additional articles: Pay Attention to Income Tax when Creating Estate Plans and How Changes to Portability of the Estate Tax Exemption May Impact You and What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate?
Reference: CNBC (June 30, 2022) “Here’s how ABLE accounts, special needs trust differ…and how they can work together”