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Planning for a loved one with a disability means finding ways to provide financial support while protecting access to government benefits. The right approach allows them to maintain independence and security without jeopardizing programs like Medicaid or Supplemental Security Income (SSI). Some families choose to set aside funds through a special needs trust, while others use an ABLE account. Each option offers unique advantages, and in some cases, combining both can be the best solution. Understanding how these tools work will help you make informed decisions that support your loved one’s future while keeping their financial stability intact.
What Is a Special Needs Trust?
A special needs trust (SNT) is a legal tool that allows you to set aside money for a person with a disability without affecting their eligibility for government benefits like Medicaid or SSI. These trusts are designed to cover expenses that improve the beneficiary’s quality of life without providing direct income to the beneficiary.
There are three main types of special needs trusts:
- First-party SNTs: Funded with the beneficiary’s own money, often from an inheritance or legal settlement. Medicaid may be reimbursed upon the beneficiary’s death.
- Third-party SNTs: Created by a parent, grandparent, or another person using their own assets. These trusts do not require Medicaid payback.
- Pooled SNTs: Managed by a nonprofit organization, combining funds from multiple beneficiaries for investment purposes.
Funds from an SNT can cover a wide range of expenses, including:
- Medical treatments not covered by insurance
- Education and training
- Assistive technology
- Travel and recreational activities
What Is an ABLE Account?
An ABLE account is a tax-advantaged savings account designed for individuals with disabilities. It allows funds to be saved and used for qualified expenses without affecting government benefits like Medicaid or SSI. The account holder, family members, or friends can contribute, but there are annual contribution limits.
To qualify for an ABLE account, the beneficiary must have developed their disability before age 26.
Key features of ABLE accounts:
- Contribution limits: Annual contributions are capped based on federal limits.
- Tax benefits: Earnings grow tax-free, and withdrawals for qualified expenses are not taxed.
- Spending flexibility: Funds can be used for various expenses, including housing and rent, education and job training, healthcare and assistive technology, and transportation.
One important consideration is that, depending on the state’s rules, Medicaid may reclaim the remaining funds after the account holder’s death.
Key Differences Between Special Needs Trusts and ABLE Accounts
Both special needs trusts and ABLE accounts help individuals with disabilities maintain financial stability while keeping government benefits intact. However, they function differently and serve unique purposes.
Control Over Funds
A special needs trust is managed by a trustee who makes distributions on behalf of the beneficiary. In contrast, an ABLE account allows the beneficiary—or an authorized individual—to control the funds directly.
Spending Restrictions
Funds from a special needs trust cannot be used for housing or food without affecting SSI benefits. An ABLE account, however, can cover those costs without penalty.
Medicaid Payback
First-party SNTs and ABLE accounts require any remaining funds to reimburse Medicaid after the beneficiary’s passing. Third-party SNTs do not have this requirement.
Ease of Setup
An ABLE account is easier to open and manage, while a special needs trust requires legal planning and oversight by a trustee.
Which One Is Right for Your Family?
Choosing between a special needs trust and an ABLE account depends on your loved one’s financial situation, long-term needs, and ability to manage funds. An ABLE account offers flexibility and independence, allowing the beneficiary to control their own money while keeping government benefits. It works well for everyday expenses like rent, transportation, and medical costs. However, contributions are limited, and Medicaid may claim remaining funds after the beneficiary’s passing.
A special needs trust provides greater financial protection, allowing you to set aside larger sums without annual caps. It ensures that funds are managed responsibly by a trustee and can cover a wide range of expenses. Some families use both tools, with the ABLE account handling daily costs and the trust safeguarding long-term assets. We can help you explore both options to create the right plan for your family’s needs.
Plan for the Future with Sverdlov Law
Securing your loved one’s financial future requires thoughtful planning. Both special needs trusts and ABLE accounts offer valuable benefits, and the right choice depends on your family’s unique situation. At Sverdlov Law, we will help you explore your options and create a plan that protects your loved one’s long-term well-being. Contact us today to schedule a consultation and take the next step in planning for their future.