Two options for special needs planning: ABLE accounts and SNTs

December 18, 2020

If you have a family member who has special needs, you likely know that financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 529A account, often referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.

ABCs of an ABLE account

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $15,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

ABLE vs. SNT

Here’s a quick review of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. As previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for beneficiaries of SNT’s when you include pooled SNT options. ABLE accounts are available through your home state if it offers the program, or you may enroll in any other state’s program as long as it is accepting out-of-state residents. Anyone can establish an SNT, subject to some special rules for minor beneficiaries.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contribution limits. Annual contributions to ABLE accounts are currently limited to $15,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $15,000 per year may have gift tax implications for the donor.

Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.

Medicaid Payback. Upon the death of an ABLE account beneficiary, the account must pay to the state the cost of all Medicaid services provided to the beneficiary after the ABLE account was established. Upon the death of an SNT beneficiary, there is a Medicaid payback to the state if the trust is a “first-party” settled trust, but there is no Medicaid payback to the state if the trust is a “third-party” settled trust.

Examine the differences

When considering which option is best for your family (or whether you should have both), remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help answer any questions:  Russ Russell, Debby Spain, Caty Richardson, and Sarah Johnston.