What’s the difference between Special Needs Trusts and ABLE accounts?

If you’re a parent or guardian to someone living with special needs, then understanding the options that are available for providing financial security and access to resources is likely top of mind. 

One way families can plan for their loved one’s future is through Special Needs Trusts (SNTs) and ABLE accounts — two planning tools specifically designed for individuals who meet the criteria. 

While both provide tremendous financial benefits, they also have very distinct features worth exploring to ensure your family chooses an approach that meets all their unique needs while taking into account legal requirements in order to maintain eligibility over time.

What is a Special Needs Trust (SNT)?

A Special Needs Trust (SNT) is a trust that holds assets for the benefit of an individual with special needs. 

It allows individuals with disabilities to access funds without affecting their eligibility for government benefits such as Medicaid and Social Security. 

The assets held in the trust can be used to pay for any item or service that enhances the beneficiary’s quality of life but do not count as income or resources to determine eligibility for government benefits. 

The trustee administers the trust. This individual is responsible for investing and managing the trust assets in the beneficiary’s best interests.

Three types of Special Needs Trusts

1. First-party special needs trust

First-party special needs trusts assist individuals who have disabilities resulting from injuries. This type of SNT is funded directly by the disabled individual. 

First-party SNTs act as a shelter for the injured person’s assets. The trust ensures the beneficiary maintains their eligibility for needs-based government programs like Supplemental Security Income (SSI) and Medicaid. In addition, the trust’s assets can be used for various medical services.

2. Third-party special needs trust

Third-party Special Needs Trusts provide financial stability for special needs individuals who generally cannot live independently or work and generate income. 

Unlike a first-party SNT funded directly by the disabled person, a third-party Special Needs Trust is financed by a family member or other third party to aid the beneficiary. 

A third-party SNT is typically part of a benefactor’s estate plan to aid the special needs individual. The beneficiary can receive this financial support while the donor is still alive, after they pass away, or both.

Third-party special needs trust benefits

• The trust can hold an unlimited number of assets.
• The beneficiary can use the funds from the trust for any of their needs.
• The trust won’t affect the beneficiary’s government benefits.
• The government cannot claim assets in third party trusts (e.g., Medicaid payment reimbursement).

3. Pooled Trust

Pooled trusts are managed by a nonprofit organization. With a pooled trust, the grantor can avoid the burden of selecting a trustee who may lack experience in managing trust assets. The assets will continue to be held exclusively for the benefit of the grantor’s loved one.

When the beneficiary passes away, any remaining funds go back to the state, or the nonprofit organization takes ownership.

What is an ABLE Account?

An ABLE Account (Achieving a Better Life Experience account) is a tax-advantaged savings account created to help individuals with disabilities and their families save for qualified disability expenses. 

Anyone can contribute up to $17,000 to an ABLE account in 2023, but the contributions are not tax-deductible. The designated beneficiary’s assets can grow to as large as $100,000 without impacting their eligibility for government benefits. 

The funds in the ABLE Account can be used for qualified disability expenses, including education, housing, transportation, and health care. The funds are also exempt from estate taxes. 

Qualification requirements for ABLE accounts

The beneficiary must meet the following requirements:

• Collecting Supplemental Security Income (SSI) for blindness or a disability that occurred before age 26
• Has suspended SSI because of extra income but still eligible based on blindness or disability occurring before age 26
• Getting disability insurance benefits (DIB), widows with disabilities or widower’s benefits (DWB), or childhood disability benefits (CDB) based on blindness or disability that began before age 26
• The subject of a disability certification

SNTs vs. ABLE Accounts

Special Needs Trust 

• Funds do not count as income or resources when determining eligibility for government benefits. 
• Funds can be used for any item or service that enhances the beneficiary’s quality of life. 
• Trust is administered by a trustee responsible for investing and managing the trust assets in the beneficiary’s best interests.

ABLE account

• Individuals can deposit up to $17,000 annually into an ABLE account without affecting the beneficiary’s eligibility for government benefits. 
• Funds in the ABLE Account may be used to pay for qualified disability expenses, including education, housing, transportation, and health care. 
• Funds in an ABLE Account are also exempt from estate taxes. 

Can I have an SNT and an ABLE Account?

The answer is yes. One doesn’t cancel the other out. Moreover, you can fund an ABLE account from a special needs trust.

How to set up a special needs trust 

An estate planning attorney can help you set up a Special Needs Trust. To set up an SNT, you will need to do the following: 

1. Decide what is most important to your loved one

Here are some questions to consider:

• What amount of funds will give them the quality of life you desire?
• Approximately how long will the trust funds need to last to provide your loved one financial support?
• How often do you want the funds to be disbursed?
• What specific needs will these funds meet?
• Where do the leftover funds go when they pass?
• Will your child control the trust funds, or will a third-party

2. Choose a trustee 

Appointing a trustee is another extremely important step. This individual is responsible for managing and investing the trust assets, keeping current with laws and regulations, and satisfying tax obligations.

A trusted relative or family friend is the most common trustee chosen. However, a parent, guardian, or professional organization specializing in special needs trusts can also fill the role. 

If you choose a professional organization to act as your trustee, just remember that you will have to pay for their services. These organizations combine the expertise of attorneys, financial planners, trust officers, and other professionals to provide comprehensive services to individuals with special needs and their families. 

As long as you can afford the added cost, in most cases, it is in the best interest of the SNT beneficiary to have a professional trustee with specialized skills named as the trustee or co-trustee.

3. Set up the trust

Although setting up a special needs trust can be done independently, it’s crucial to ensure that the wording in the trust documents is accurate. Incorrect phrasing might create complications that disqualify beneficiaries from receiving their entitled benefits. For this reason, it’s advisable to enlist a special needs trust attorney.

Once the trust is drafted and satisfactory to your child’s needs, make sure all parties sign the document, have it notarized, and register it with the IRS.

4. Add the funds

Once everything is signed, it’s time to transfer assets into the trust. You can fund the trust with various assets, including:

• cash
• investments
• life insurance policies 
• or you can designate certain properties through your will, like brokerage or retirement accounts

How to set up an ABLE account

A parent, beneficiary, guardian, or agent appointed through power of attorney can open an ABLE account. However, it’s a good idea to talk to a special needs attorney about setting up a power of attorney to prevent any issues with signature authority, regardless of who manages the account.

1. Sign-up process

You can complete the online application process to apply for any of the programs. You can contact your state program by phone or email for assistance. 

Guardians, conservators, or agents designated via power of attorney must provide evidence of their legal responsibility when filling out the form. However, parents of minor beneficiaries can apply online.

2. How to contribute

Anyone can contribute up to limits set by the Federal Government. Beneficiaries can only have one account and have balance limits to maintain their SSI. It’s also important to check your state’s Medicaid rules, as they vary by state. 

3. Invest your contributions

Different states have different investment offerings, ranging from low-to-high risk, so it’s important to check the investment options where you live.

Final word

Taking care of your loved one with special needs is a very important task. Establishing a Special Needs Trust and an ABLE Account can help ensure that the individual has the financial resources they need to live their life as independently as possible. 

When setting up either, it’s important to consider what will work best for your loved one’s unique situation. Depending on their specific needs, creating both a Special Needs Trust and an ABLE Account may be optimal. 

The best advice is to consult an estate planning lawyer for more information on how to set up your trust or account that meets your individual needs. Ultimately, taking these steps will provide peace of mind knowing you are helping to prepare for your loved one’s long-term future.