How ABLE accounts, special needs trusts work together, and differ


Because of astronomical costs of care and support — often more than $100,000 per year — most individuals with disabilities will need government assistance such as Supplemental Security Income and Medicaid.

However, they must shelter their assets carefully to not be disqualified from these programs. That’s where special needs trusts and ABLE accounts come in.

Special needs trusts explained

There are two kinds of special needs trusts:

  • Third-party: “This type of trust is funded with the parents’ [or others’] money, solely for the child’s need and will never be in the child’s name,” said Charles Italiano, assistant director of Westchester Disabled On the Move, in Yonkers, New York. “After the parents pass away, the funds go to someone other than the child.”
  • First-party: This trust is created with the individual’s own assets to shelter any income, whether earned or inherited, in order to not exceed Medicaid income and asset limits. Distributions must be approved by the trustee, and any funds remaining after the individual’s death may be claimed by Medicaid, if the person was a recipient, he said.

Special needs trusts cannot be used for certain basic expenses that are covered by government programs, said certified financial planner Mike Walther, founder of Oak Wealth Advisors in Northbrook, Illinois. These include groceries, which are covered by Supplemental Nutrition Assistance Program; medical expenses, covered by Medicaid; and housing expenses, covered by SSI.

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As government programs do not cover all expenditures related to these categories, ABLE accounts can be used to pay for shortfalls.

What is an ABLE account?

ABLE accounts, defined as “tax-advantaged savings accounts that can fund disability expenses,” can be used for a broad range of “qualified disability expenses,” which generally refer to expenditures that aid the individual “in maintaining or improving his or her health, independence, or quality of life.”

These can cover anything for the individual’s benefit, such as a computer, communication devices, education, training, financial management, support services, assistive technology, food (restaurants, prepared foods), basic housing expenses (rent, mortgage payments, basic utilities) and more, according to Michael Beloff, partner and Chartered Special Needs Consultant with Belvedere Wealth Partners in Stamford, Connecticut.

 Important points about ABLE accounts

  • The account-holder with disabilities must have been diagnosed before age 26.
  • The individual always has control, versus the special needs trust, where the trustee makes the decisions.
  • ABLE accounts are inexpensive and easy to set up and can be funded immediately with small amounts.
  • Individuals must go through a state website to open an ABLE account and, depending on the state, distributions (payments) may be executed in the form of a checking account, a debit card or via a direct request. — D.N.

Under current federal law, a trustee can make a distribution from a special needs trust to an ABLE account to pay for the individual’s bills. Similar to a first-party trust, the ABLE fund balance can be claimed by Medicaid upon a Medicaid recipient’s death.

“Not all states have ABLE accounts, but people from those states can open one in states where non-residents are allowed,” Walther said. “And it’s OK to shop around.”

Here is a comparison matrix of ABLE accounts in different states, courtesy of Oak Wealth Advisors.

One major feature of an ABLE account, as opposed to a regular checking account, is that it allows the individual to accumulate more than $2,000 without jeopardizing means-tested benefits, Italiano said.

ABLE account holders can keep their funds in cash or they can invest them. Each state has contracted with an investment company and offers a choice of investment mixes, Beloff said.

“ABLE accounts are great tools for an individual with a disability to manage funds, but they are not a replacement for a special needs trust,” he said.

“This is because you can contribute only $16,000 [in 2022] per year to the ABLE, but the majority of parents leave more than that” in inheritance, Beloff added. “Therefore, they need a different vehicle [with no contribution limit] to house the money.”


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