Updated: Jun 19
If you have a loved one with a disability, you may be wondering about the best way to save for their future and provide ongoing support--particularly in the event of your death. Two common options are ABLE accounts and special needs trusts. Both of these options can help you protect your loved one's assets and benefits, but they have different features and benefits.
ABLE accounts are a relatively new type of savings account that was created by the ABLE Act of 2014. Resembling a 529 account--with which you may be familiar as a pre-tax savings account for a dependent's education expenses--ABLE accounts are designed to help people with disabilities save for qualified disability expenses (QDEs). QDEs can include things like housing, transportation, education, and health care. To qualify for this federal savings program, the person must have a qualifying disability and have become disabled prior to the age of 26. People who qualify for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) for disability or blindness onset prior to 26 will automatically qualify.
There are a few key advantages to ABLE accounts. (**This will be a generalization of current financial guidelines. You should check with your accountant, financial planner, or a tax attorney for more comprehensive advice.) First, the individual with disabilities can open and manage their own account if they have capacity to do so. If they lack capacity, then a parent, guardian, or power of attorney can open and manage the account. Second, contributions to ABLE accounts are tax-deductible and can be made by the account owner, family, or friends. Third, interest earnings in ABLE accounts can grow tax-free. Fourth, withdrawals from ABLE accounts are not subject to federal income tax, as long as the funds are used for QDEs and according to the account's guidelines.
However, there are also some limitations to ABLE accounts. For example, the maximum annual contribution limit is $17,000 for 2023. This is tied to the federal "gift tax" limit and is subject to periodic changes to account for inflation. And, the total balance in an ABLE account cannot exceed $100,000 without affecting SSI benefits. You can find more information and choose to invest with a private investment firm or with the state plan available through the Kansas State Treasurer.
Special Needs Trusts
Special needs trusts have been around for much longer than ABLE accounts. Special needs trusts are designed to provide financial support to people with disabilities without affecting their eligibility for government benefits, such as Medicaid and Supplemental Security Income (SSI).
There are two main types of special needs trusts: first-party trusts and third-party trusts. First-party trusts are funded with the assets of the person with the disability. Third-party trusts are funded with the assets of someone else, such as a parent or grandparent. They can even be funded by another trust, such as a revocable living trust or testamentary trust (as in a Will). Similar to a living trust, the special needs trust will have a trustee tasked with managing any distributions according to the terms of the trust.
A special needs trust offers a number of advantages. It can protect assets from creditors and lawsuits. It can also provide flexibility in how the funds are used. And, it can help people with disabilities maintain their eligibility for government benefits because the funds are actually held by the trust, not by the individual. In fact, it may be possible to have an ABLE account and a special needs trust in co-existence.
However, there are also some disadvantages to special needs trusts. They can be expensive to set up and maintain. (This office will work with clients on setup costs, but depending on whether a private party agrees to act as the Trustee, a professional trustee may require a fee.) And, they can be complex to manage. It requires some work and may result in ongoing legal costs over time as circumstances change.
Which Option is Right for You?
The best option for you will depend on your individual circumstances. If you are looking for a simple, affordable way to save for your loved one's future, an ABLE account may be a good choice. If you need a more flexible and complex solution, a special needs trust may be a better option. If you want to include this as part of your own estate plan to make sure your adult child is taken care of after your death, then you might consider both as part of your plan.
If you are not sure which option is right for you, it is important to speak with your financial advisor and your attorney to help you understand your options and choose the best solution for your loved one.
If you have any questions about ABLE accounts or special needs trusts, please contact the office today. I would be happy to discuss your options and help you choose the best solution for your loved one.
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