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Disability Savings Accounts: ABLE 529a vs a Special Needs Trust

With the passing of legislation establishing the ABLE 529a, many people now have access to increased disability savings account options and wonder how ABLE accounts differ from a special needs trust, and when it makes sense to establish one versus the other.



Often, the biggest concern for Special Needs Families is the concern for how to care for their child when they are no longer capable of doing so.  For those that may need a lifetime of care, the costs can quickly add up.  A smart savings plan is imperative for families preparing for the inevitable.  Fortunately, there are several tools available for a Special Needs Family.   Knowing which tool is right for your situation is the hard part.  There are many factors to consider as you plan for your family’s future.  No two individuals with disabilities are exactly alike, therefore, no two plans will be identical either.


A significant concern in special needs planning is ensuring an individual can qualify for public benefits.  A person with a disability with more than $2000 in countable resources will become disqualified for Medicaid and Supplemental Security Income (SSI).  A special needs plan must be structured in a way to prevent this loss of services, while still allowing families to save for future needs.  Fortunately, two primary tools help families save for the future while still maintaining eligibility for benefits.  Those tools are an ABLE 592a account and a Special Needs Trust (SNT).


Until the ABLE (Achieving a Better Life Experience) Act became law the SNT was the only legal way to save money without sacrificing eligibility for government benefits.  With the passing of legislation establishing the ABLE 529a, many families often wonder how ABLE accounts differ from a special needs trust, and when it makes sense to establish one versus the other. This is a choice that depends on personal circumstances and in many cases it may make sense to create both an ABLE account and an SNT.


The ABLE Account


The ABLE Act allows individuals with disabilities to open a special saving account for disability-related expenses. The ABLE Act built upon the existing 529 college savings account legislation and works similarly to the successful college savings program.  The act specified that the ABLE account beneficiary must have had a disability before the age of 26.  This eliminates anyone who sustained an injury or became disabled after that age.


Funds in an ABLE account can grow tax-free if those funds are used for what is called a Qualifying Disability Expense (QDE). Most importantly, the funds in an ABLE account do not count towards the asset limitation established by means-based benefit programs such as Medicaid and Supplemental Security Income (SSI). As such the funds in these accounts are intended to supplement not replace government benefits and as a result, have some limitations.


The Special Needs Trust (SNT)


A SNT is a legal document that is established to place funds and other assets under the control of a trustee and is designed to manage those assets for the benefit of a person with special needs without causing that person to lose their eligibility for SSI and Medicaid. Just like an ABLE account, funds in a SNT may supplement but are not intended to replace means-tested government benefits.  There are three distinct types of SNTs a family may consider: Third-party or supplemental trusts, first-party or pay-back trusts, and pooled trusts.


The most common SNT are Third-Party Trusts or Supplemental Needs Trusts.  A Third Party Trust is funded with assets belonging to a person other than the beneficiary. In fact, no funds belonging to the beneficiary may be used to fund the trust.[1] Typical funding comes from gifts, inheritance, and proceeds of life insurance policies. Third-party trusts can be established by anyone for the sake of the beneficiary.  It is common for a parent or grandparent to establish this type of trust for the benefit of a special needs child or grandchild as a mechanism for saving for their future using investment income or life insurance proceeds.


A First Party Trust is funded with assets or income that belong to an individual with a disability and who is the beneficiary of the trust.  The trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary’s death or upon the termination of the trust, and the trust must be administered for the sole benefit of the beneficiary. Typically the funding comes from a personal injury settlement, parents’ survivorship pension benefits, or inheritance the beneficiary receives directly.[2]


The last type of SNT is a Pooled Trust.  A Pooled Trust is a public trust that pools the resources of many beneficiaries.  A Pooled Trust is typically administered by a nonprofit association and is professionally managed.  Because the cost is being shared across the pool the costs tend to be lower than many other private trusts.  However, there are also limitations as the pooled trusts are only as good as the trustee administering them.  Pooled trusts also tend to be much more rigid in the implementation than a private first-party or third-party trust.




ABLE accounts are relatively inexpensive to set up. The setup costs are determined by the state.  Many states only charge a nominal setup fee as low as $25 to get started. By contrast, no matter which type you choose, a SNT can be costly and complicated to establish.  Many specialty lawyers may charge upwards of $2,000 to $5,000 for a properly drafted SNT.   The complexity of the situation and your home state’s rules will often drive the price.


If you are going to establish a SNT, you do not want to skimp on the fee.  Finding an attorney who is a true specialist in this field is important.  If designed incorrectly, the SNT can render the beneficiary ineligible for benefits thereby making the trust useless and putting their care at risk. Picking the correct attorney from the beginning is imperative.  A great place to find a lawyer who specializes in SNT is the Special Needs Alliance[3] or The Academy of Special Needs Planners.[4]


Who is in charge of the Account?


A first-party SNT may only be established by the beneficiary, their parents, grandparents, conservator/guardian or the court, while a third party SNT may be established by anyone except the beneficiary. However, SNTs can only be managed by a designated trustee identified in the SNT.


For an ABLE account, the beneficiary is actually in charge of managing the account as long as the individual with disabilities is capable of doing so.   This provides great independence for those who have the capacity to handle their financial affairs.  If under 18, a parent or guardian will likely manage the account for the beneficiary until they reach adulthood.  If the beneficiary is not capable of handling their own affairs and needs assistance, the account can be managed by their parents, conservator, guardian, or agent under a power of attorney.


Contribution Limits 


An ABLE account does not affect means-tested benefits up to a limit of $100,000. An individual may have only one ABLE account, and total annual contributions are pegged to the annual federal annual gift tax exclusion of $15,000 for 2018.  Total lifetime contributions to an ABLE account are tied to each provider state’s limit on total contributions to its 529 College Savings Plan. State limits vary from approximately $250,000 to $450,000.


Even though the overall contribution limit may be up to $450,000, any amount over $100,000 in an ABLE account counts towards the individual’s $2,000 resource limit for SSI and Medicaid eligibility and causes the individual’s SSI payments to be suspended until the account balance decreases to less than $100,000. If all other eligibility rules are followed, the individual’s SSI payments will resume when the account balance drops below $100,000 without the need to reapply for SSI. During the SSI suspension period, the individual’s SSI-linked eligibility for Medicaid continues uninterrupted. Given the annual contribution limit of $15,000, these lifetime limits would likely not be reached for decades, even if no disbursements are made from the ABLE account during the accumulation period.


A SNT on the other hand does not affect means-tested benefits.  Simply, there are no limits to how many SNTs an individual may have or to how much each trust may hold.  A SNT is significantly more flexible for lifetime savers because there is no upward limit.


Types of Funding and Investment Options


Anyone can contribute directly to an ABLE account.  They are operated similarly to a 529 account and each state’s ABLE program designates the investment options available to account holders.  Options typically provide a mix of mutual funds, stocks, bonds, and cash holdings to invest in.  The beneficiary’s (or guardian) risk tolerance and timeline should determine the asset allocation strategy.  While the child is relatively young and in the accumulation phase, it will often make sense to be heavily weighted in stocks.


However, as the beneficiary approaches an age where they will need to access funding, it may make sense to change the asset allocation to a more conservative strategy with some of the investments converting to cash and bond holdings.  It is a personal choice and the actual investments available will vary by state.   Changes to the asset allocation and investment strategy may be made no more than twice annually. A good financial advisor who specializes in special needs planning can help you pick the right allocation for your needs.


A SNT on the other hand is essentially a bucket that can hold any type of asset.  It is up to the trustee to determine what type and what allocation of assets he or she wants to invest in.  A SNT can hold real-estate, such as a house, or personal property such as a car.  Also, a SNT is designed to hold investment and retirement accounts if the beneficiary designation lists the trust. Using a bucket strategy to manage a trust account may often be a smart move.


A word of caution; SNT investments are made at the sole discretion of the appointed trustee, who has a fiduciary responsibility to act in the beneficiary’s best interests.  This means they must demonstrate the investment strategy is sound and in the best interest of the beneficiary.  The trustee can be held personally liable for their investment decisions. It is wise for the trustee to use a qualified financial advisor who specializes in special needs planning to help manage the investment strategy of the trust.


There are several ways in which the Special Needs Trust can be funded. 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.  Because there is no contribution limit for the SNT if the individual receives a legal settlement, a gift from an estate, or regular contributions from the grandparent of other family members these funds can be deposited in the SNT tax-free.


Distribution and Qualified Expenses


An ABLE account may pay for the beneficiary’s “qualified disability expenses” (QDEs) to maintain or improve the health, independence, or quality of life of the beneficiary.  This includes basic living expenses, education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management, and administrative services.  If withdrawals are made for expenditures other than QDEs, the earnings portion of the withdrawal would be subject to regular income tax and a 10% penalty. In those states that have adopted special state income tax benefits, improper withdrawals might also incur additional state tax penalties.


SNT funds can be spent more broadly. A SNT may pay for anything that benefits the beneficiary alone, other than food and housing, without affecting government benefits.  SNT distributions can pay for things like a vacation, a concert, or a game.  The expenditures are at the trustee’s discretion. If the beneficiary is an SSI recipient, food and housing expenditures are considered in-kind support (ISM) and will reduce payments from that program.


Watch out for the Payback Provision


Some SNT has what is called a payback provision.  This provision ensures that state Medicaid programs that provide medical assistance and/or “waiver” services for the benefit of the beneficiary (including community-based residential services) may assert a “payback” claim for reimbursement upon the beneficiary’s death, payable from funds remaining in the trust.


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. Additionally, a first-party trust contains a payback provision for state Medicaid only. Only the third-party trust does not have any payback provisions. Assets in the third-party SNT will be released to designated beneficiaries, such as members of the family, and not back to the government.  If you choose a SNT, it is of the utmost importance to consult with a professional who has experience with special needs finances and legal issues to ensure assets are protected.


Just like a first-party, or pooled trust, all funds contributed to an ABLE account, including donations from third parties, are subject to this Medicaid payback if a state elects to assert the reimbursement claim.  A state must limit its payback claim to Medicaid expenditures for the benefit of the beneficiary which occurred after the creation of the ABLE account.


So which one should we use?


SNTs and ABLE accounts are quite different and individuals with disabilities and their families should consider their specific circumstances before establishing one or the other. In some instances it may be beneficial to create both.


An ABLE account would be a good choice for an individual with disabilities who is capable of earning an income through employment and wants to save unspent work earnings without violating the general rule that the recipient of SSI and Medicaid cannot accumulate more than $2,000.


For someone whose disability appears at the age of 26 or later, the ABLE account is not even an option. Neither is it feasible for handling inheritances or personal injury settlements that exceed $15,000 (for 2018). On the other hand, for families wishing to save more than $15,000 annually or $100,000 in total, ABLE accounts would be inappropriate.  An ABLE account is also not an ideal vehicle to manage significant third-party funds due to the likelihood of a Medicaid payback claim upon the death of the beneficiary.


Trusts limit the beneficiary’s control by giving all decision-making authority concerning distributions to the trustee. If the beneficiary is capable of managing their affairs, the independence of an ABLE account is invaluable.


For most individuals with disabilities, an ABLE account is not a substitute for a SNT trust, rather it is a helpful secondary tool to augment their savings goals.  When determining whether to choose a SNT or an ABLE account, you should consult a financial advisor who specializes in special needs planning to determine the suitability of these savings tools for you and your family.


[2] Ibid.

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