Why a special needs trust is more effective than an ABLE account

Jan 21, 2016 | Estate Planning, Financial, Special Needs

Written by  Sussan, Greenwald & Wesler

Federal lawmakers recently approved a provision that will allow people with disabilities in the U.S. to save money without risking their government benefits. By opening new accounts established under the Achieving a Better Life Experience (ABLE) Act, they’ll be able to accrue up to $100,000 in savings without losing access to Social Security Disability Income, Social Security Income, Medicaid coverage, and any other government benefits that help with their care. Additionally, earnings and distributions from the account for qualified disability expenses would not count as taxable income to the disabled individual.
But what happens to that ABLE account savings when the disabled individual passes away? Any money left will go towards paying back the state for Medicaid and other public funding that was used. A more effective estate planning method is to establish a Special Needs Trust. This will ensure that the money goes to your family– not to the government.

Although the ABLE Act is a step in the right estate planning direction, there are some restrictions which prevent it from being very effective or replacing a Special Needs Trust:

  1. To open an ABLE Account, you must have a qualified disability under Social Security and have been disabled prior to age 26. With a Special Needs Trust, there aren’t any restrictions on the type of disability or age the disability occurs in order to set one up.
  2. Funds deposited into an ABLE Account have to be used exclusively for “disability-related” expenses. Special Needs Trusts are frequently used to leave money for a disabled family member’s benefit without disqualifying them from their government benefits.
  3. The annual tax-free contributions to the account may not exceed the annual gift-tax exemption amount ($14,000 as adjusted for inflation for this year), so this type of account is not an effective way to pass inheritance money to disabled family members if the inheritance amount is over that gift-tax exemption.
  4. The ABLE Act only protects benefits from the Federal Government. Each state must pass their own reciprocal law allowing these ABLE Accounts as an exempt asset, otherwise, a disabled individual who has more than $2,000 in an ABLE account could lose benefits provided by the State. A Third-Party Special Needs Trust sometimes called a Supplemental Needs Trust, will allow any inheritance amount to go into the trust with no limitations on the amount and family members can make annual contributions up to the gift-tax exemption amount just like with ABLE accounts.

Consider setting up a Special Needs Trust to help provide for an incapacitated or disabled heir. It will help supplement public benefits and provide a framework for the care and management of assets. A Special Needs Trust will also allow you to express your desires of how to provide life-enhancing benefits for family members instead of relying on the state to make certain decisions.

For more information on how to protect your legacy by establishing a Special Needs Trust and/or understand the ABLE Act better, please feel free to call our office and consult with estate planning attorney, Alex Hilsen, Esq.



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