“ABLE” ACCOUNTS VERSUS SPECIAL NEEDS TRUSTS

William Sweeney

The federal ABLE Act, was signed into law by President Obama on December 19, 2014, (Achieving a Better Life Experience (ABLE) Act of 2014 (Pub L 113-295, 128 Stat 4010). The federal ABLE act allows a state to establish and operate a qualified ABLE program under which an IRC §529A savings account, similar to a §529 savings account, may be established by individuals who became disabled before age 26 to receive nondeductible contributions up to the gift tax annual exclusion, although this limitation is applied to all contributors on an aggregate basis.

An ABLE Act account is supposed to be designed to secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, the applicable state Medicaid program, SSI, the beneficiary's employment, and other sources. Therefore, only certain expenses are allowed to be paid from an ABLE account.

These expenses are referred to as "qualified disability expenses," which mean any expense related to the designated beneficiary as a result of living a life with disabilities, including education, housing, transportation, employment training, assistive technology, health care expenses, and financial management. IRC §529A(e)(5).

Unlike regular a §529 savings accounts, tax-free distributions from the account are not limited to qualified higher education expenses but also can be made for "qualified disability expenses" including education, housing, transportation, and other expenses. Under an uncodified provision of the legislation, amounts in excess of $100,000 in an ABLE account are counted as resources of the disabled individual for purposes of eligibility for SSI and traditional needs-based Medi-Cal.

On October 11, 2015, Governor Brown signed state legislation that put into effect the federal ABLE) Act of 2014. Californians should aware of the potential advantages of an ABLE account over a special needs trust (SNT) (see below comparison).

The salient feature of an ABLE account is that it will allow family members and others to contribute funds that will not be counted as a resource for commonly used means-tested public benefit programs, including Medi-Cal and SSI.

The California ABLE Act allows people with disabilities, with an age of onset up to 26 years old, to create the account. Contributions to an ABLE account are not tax deductible and income earned in an ABLE account is not taxed. A person who is not a recipient of SSI and/or SSDI but still meets the age of onset disability requirement may still be eligible to open an ABLE account if he or she meets SSI criteria on significant functional limitations. The person does not need to be under the age of 26 to be eligible for an ABLE account; he or she could be over 26 as long as he or she has documentation of disability that indicates age of onset before the age of 26. See IRC §529A(e)(1). The ABLE Act limits the opportunity to one ABLE account per eligible individual. IRC §529A(b)(1)(B).

There are important limitations with regard to an ABLE account (see IRC §529A):

  1. The maximum annual contribution limit, from all sources, is the amount of the annual federal gift tax exclusion, which is currently $14,000 (the amount of the annual federal gift tax exclusion in 2018).
  2. Earnings on the account are not taxable.
  3. Only individuals who became disabled prior to age 26 can establish an account.
  4. An eligible individual is limited to only one account.
  5. Distributions are tax-free as long as they are used to pay Qualified Disability Expenses as defined by IRS regulations.
  6. Distributions are taxed (plus 10 percent penalty) if they are used to pay for non-qualified disability expenses.
  7. On the death of the ABLE account beneficiary, any assets remaining in the account must first be used to pay back the State Medicaid agency before going to heirs.
  8. The total limit over time that may be made to an ABLE account is subject to the maximum amount allowed in a State's 529 Plan program (in California the limit is $475,000).

For individuals with disabilities who are recipients of SSI or Medi-Cal, the ABLE Act sets further limitations:

  1. The first $100,000 in an ABLE account is exempted from the SSI and Medi-Cal $2000 individual resource limit.
  2. If an ABLE account exceeds $100,000, the beneficiary would be suspended from eligibility for SSI benefits and no longer receive that monthly income. However, the beneficiary would continue to be eligible for Medi-Cal.

SPECIAL NEEDS TRUST (SNT) VS. ABLE: WHICH IS RIGHT FOR YOU?

The benefits and disadvantages of the ABLE and the SNT will differ for each person/family, depending on the individual's circumstances.

The Special Needs Trust (SNT) - What is it?

Essentially, the Special Needs Trust (SNT) - which is established by placing funds and other assets under the control of a trustee - is a legal document that is designed solely for the financial protection of an individual with a disability. Until the ABLE Act became law it was the only legal way to save money without sacrificing eligibility for government benefits. It is also important to note that the funds in the special needs trust supplement but do not supplant government benefits. In other words, the special needs trust is designed to provide financial assistance for any care above and beyond what the government provides.

There are a number of ways in which the Special Needs Trust can be funded, either during the lifetime of the grantor, or upon their death. The trust allows family members to gift assets and leave inheritances or life insurances to a person with special needs without disqualifying him or her from government benefits.

There are three distinct types of Special Needs Trusts: third party/supplemental trusts, first party/pay-back or self-settled/d(4)(A) trusts, or pooled Special Needs Trusts. Most Special Needs Trusts are third party/supplemental special needs trusts, unless the assets were originally in the beneficiaries' name or there are not enough assets to pay the fees to establish the third party special needs trust.

The important thing to remember when trying to decide between the ABLE Account and the Special Needs trust is that both of these savings vehicles are intended to work the same way: to give individuals with disabilities the ability to save without losing their means-based assets. The personal financial situation of the individual will determine which option is the most beneficial.

The Special Needs Trust Versus the ABLE Account

To begin, the SNT is costly and complicated to establish; if designed incorrectly, the SNT can actually render the beneficiary (individual with a disability) ineligible for the benefits.

In addition to this, picking the correct SNT form is very important - for example, the pooled SNT (often chosen to minimize the management fees) has a payback provision either to the state for Medicaid expenditures or to the non-profit. The First Party - also known as a Medicaid Pay Back trust - contains a payback provision for state Medicaid only. Only the third party form does not have any pay back provisions.

Also, a (d)(4)(A) SNT cannot be established for an individual age 65 and over [see 42 USC §1396p(d)(4)(A)]. Although a pooled Special Needs Trust does not have an age requirement for establishing it [see 42 USC §1396p(d)(4)(C)], transferring assets into it for an individual age 65 and over will trigger an SSI eligibility penalty and may trigger a Medi-Cal eligibility penalty.

A penalty may likewise be applied for an individual age 65 or over who transfers funds into an ABLE account. Although that individual may have become disabled before age 26, and therefore qualified to establish an ABLE account, transferring assets to the ABLE account will likely result in a penalty if the individual is age 65 or older.

The ABLE Account is undoubtedly easier to establish than the SNT; the funds can grow tax free within the account, and it is less costly. Additionally, an individual with special needs can manage this account him/herself.

On the negative side, the ABLE Account beneficiary must have had the disability before the age of 26; this eliminates anyone who sustained an injury or became disabled after that age. The contribution limit for the ABLE Account is $14,000 per year in 2018, up to a limit of $100,000. Anything over this limit will disqualify an individual from Social Security Insurance.

As well, all ABLE accounts will have a Medicaid payback provision, meaning that if the beneficiary dies, the funds in the ABLE account will be used to pay Medicaid for services rendered during the lifetime of the beneficiary before being released to family members.