Because of the astronomical costs of care and support—often more than $100,000 a year—most people with disabilities will need government assistance, such as Supplemental Security Income and Medicare.
However, they must carefully preserve their assets to avoid being disqualified from these programs. That’s where special needs trusts and ABLE accounts come into play.
There are two types of special needs trusts:
- Third party: “This type of trust is funded by the parents [or others’] the money is solely for the child’s needs and will never be in the child’s name,” said Charles Italiano, assistant director of Westchester Disabled On Move, in Yonkers, N.Y. “After the parents die, the funds go to someone else’s child.”
- First side: This trust is created from the individual’s own assets to preserve any income, earned or inherited, so as not to exceed the Medicaid income and asset limits. The distribution must be approved by the trustee, and any funds left after the person’s death can be claimed by Medicaid if the person was a recipient, he said.
Special needs trusts can’t be used for some basic expenses covered by government programs, said certified financial planner Mike Walter, founder of Oak Wealth Advisors in Northbrook, Illinois. These include foods covered by the Supplemental Nutrition Assistance Program; medical expenses covered by Medicaid; and housing expenses covered by SSI.
Because government programs do not cover all costs associated with these categories, ABLE accounts can be used to pay the shortfall.
ABLE accountsdefined as “tax-advantaged savings accounts that can finance disability expenses” can be used for a wide range of “qualified disability expenses,” which generally refer to expenses that help a person “maintain or improve his or her health, independence, or quality of life.”
They can cover anything for a person’s benefit, such as a computer, communication devices, education, training, financial management, support services, assistive technology, food (restaurants, ready meals), basic housing costs (rent, mortgage payments, basic utilities) and more, according to Michael Beloff, partner and Certified Special Needs Counselor with Belvedere Wealth Partners in Stamford, CT.
Important points about ABLE accounts
- The disabled account holder must have been diagnosed under the age of 26.
- The person is always in control, compared to a special needs trust where the trustee makes the decisions.
- ABLE accounts are inexpensive and easy to set up, and can be loaded with small amounts immediately.
- Individuals must go through a state website to open an ABLE account, and depending on the state, distributions (payments) may be made in the form of a checking account, debit card, or direct request. — DN
Under current federal law, a trustee may make a distribution from a special needs trust to an ABLE account to pay the individual’s bills. Similar to a priority trust, the balance of an ABLE fund can be claimed by Medicaid upon the death of a Medicaid beneficiary.
“Not all states have ABLE accounts, but residents of those states can open them in states where non-residents are allowed,” Walter said. “And you can go shopping.”
Here is a comparison matrix of ABLE accounts in various states, courtesy of Oak Wealth Advisors.
One of the main features of an ABLE account, unlike a regular checking account, is that it allows a person to save more than $2,000 without compromising means-tested benefits, Italiano said.
ABLE account holders can keep their funds in cash or invest them. Each state contracts with an investment company and offers a choice of investment mixes, Beloff said.
“ABLE accounts are a great tool for a person with a disability to manage money, but they are not a substitute for a special needs trust,” he said.
“That’s because you can only deposit $16,000 [in 2022] per year before ABLE, but most parents leave more than that, Beloff added. “So they need another vehicle [with no contribution limit] to make money.”