THE INTERPLAY BETWEEN ABLE ACCOUNTS AND SPECIAL NEEDS TRUSTS
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
An ABLE account is an account established for the benefit of an individual with disabilities. While most people point to the fact that the earnings on the ABLE account are tax free as the chief benefit of these accounts, I believe that a much more significant advantage is that the individual with disabilities or a family member can control the money in the account. The purpose of the ABLE Act is to permit people with disabilities to save money in and withdraw funds from their ABLE accounts to pay for disability-related expenses, in support of their efforts to maintain health, independence and quality of life. Monies in an ABLE account are not counted as assets for SSI purposes up to $100,000. Funds in the ABLE account are not counted for Medicaid eligibility purposes up to certain limits that vary by state. The maximum limit for New Jersey is $305,000. The maximum for Pennsylvania is $511,758. To be entitled to benefit from an ABLE account, the individual must be under 26 years of age at the time of the onset of the disability; however, the ABLE account can be established after age 26. There can be only one account, but there is no limit on the number of individuals who can contribute to the account. Contributions cannot exceed the annual exclusion gift amount for the federal gift tax, which for 2018 is $15,000. The ABLE account may be established by the individual with disabilities, a parent or guardian acting on the individual’s behalf. On the death of the beneficiary of the ABLE account, Medicaid must be repaid any funds paid under the medical assistance program since the establishment of the ABLE account. Because of the payback, it usually does not make sense to fund the ABLE account too generously.
A First-Party Special Needs Trust is established with the assets of the individual. The beneficiary of the trust must be disabled as defined by the Social Security Act. The beneficiary must be under 65 years of age at the time the trust is established and funded, the trust must be for the sole benefit of the individual with disabilities, the trust must be established by a parent, grandparent, guardian, court or the individual with disabilities. Upon the death of the beneficiary, the trust must pay back Medicaid for all monies advanced under the medical assistance program since the birth of the beneficiary. Assets in the trust are not counted for income or eligibility purposes for either SSI or Medicaid.
A Third-Party Special Needs Trust is established with assets of an individual other than the beneficiary of the trust. The beneficiary must be disabled within the definition of the Social Security Administration. There is no limit to the amount that can be used to fund the trust. Anyone other than the beneficiary with disabilities may contribute to the trust. There is no Medicaid payback on the death of the beneficiary.
Whether there is a First-Party or Third-Party Special Needs Trust, it often makes sense to establish an ABLE account outside the trust for the benefit of the trust beneficiary. The trustee cannot establish the ABLE account, because the account must be established by the individual or a parent or a guardian. However, the Special Needs Trust can be authorized to fund an ABLE account. This arrangement gives the individual with disabilities much more flexibility and the right to exercise some control over funds.