by: Begley Law Group

by Thomas D. Begley, Jr., Esquire, CELA

[Article originally published in The Barrister]  Personal injury plaintiffs who suffer from disabilities and are required to establish Self-Settled Special Needs Trusts in order to maintain their public benefits should consider establishing an ABLE account at the same time.

While most people consider the tax-free income of an ABLE account to be a primary benefit, in most cases this is likely to be minimal. The income is likely to be low, and the person with disabilities may have significant deductions.  The primary benefit is that the individual with disabilities, or his/her parents, can control the ABLE account.

Trustees of Self-Settled Special Needs Trusts should always be professional trustees.  There are many advantages to a professional trustee.  However, professional trustees also impose certain restrictions and time delays that can be avoided when the individual with disabilities or parents can control some funds.  The ideal solution is to establish a Self-Settled Special Needs Trust and also an ABLE account.

Funds in the ABLE account can be used by the person with disabilities or family members to pay for qualified disability expenses without going through the trustee.  The person with disabilities has a greater sense of independence by virtue of controlling the funds in the ABLE account.

Many plaintiffs in personal injury cases suffer from disabilities and are entitled to means-tested public benefits such as SSI, Medicaid, Medicaid Waivers, Section 8 Housing, SNAP (Food Stamps), energy assistance, pharmaceutical assistance, and group homes.  In order to maintain many of these benefits, the individual is not permitted to have more than $2,000 of assets in his/her name.  The solution, historically, has been to transfer the personal injury recovery to a Special Needs Trust.  Assets in the trust are not counted as assets of the individual for SSI, Medicaid and many other purposes.  Distributions from the Special Needs Trust must be at the discretion of the trustee and are limited to the sole benefit of the trust beneficiary. In New Jersey, distributions in excess of $5,000 can only be made upon 45 days’ notice to the State Medicaid Agency, and there is a payback to Medicaid upon the death of the beneficiary. Under a Self-Settled Special Needs Trust, all Medicaid received since the birth of the beneficiary must be repaid.

An ABLE account can be established for an individual whose disability onset occurred prior to age 26.  Each beneficiary can have only one ABLE account, but contributions to that account can be made by anyone including the beneficiary, family members or friends.  Distributions can be made from a Special Needs Trust to an ABLE account.  Good practice dictates that the trust instrument authorize such distributions.  There is a contribution limit of $15,000 per year in 2018.  This contribution level is indexed to the annual exclusion for gift tax. Income earned by an ABLE account is not taxable.  Distributions from the ABLE account must be used for qualified disability expenses, or the IRS imposes a 10% penalty.  Technically, the money belongs to the beneficiary.  Under an ABLE account, on the death of the beneficiary there is a payback for all Medicaid received since the inception of the account.

A Self-Settled Special Needs Trust is a Grantor Trust, which means that the income on the trust is taxed to the beneficiary of the trust. On the other hand, earnings on an ABLE account are tax-free, so long as the funds are used for qualified disability expenses.

Qualified disability expenses include:

  • Education,
  • Housing,
  • Transportation,
  • Employment support,
  • Assistive technology,
  • Legal fees,
  • Funeral expenses,
  • Personal support services,
  • Healthcare expenses,
  • Financial management, and
  • Administrative services.

Income has various meanings for various purposes. Taxable income generally includes all earned and unearned income.  For public benefits purposes, income generally includes distributions of income and principal.  An exception appears to be Federally-Assisted Housing where only income, not principal, is considered income for income eligibility purposes.  However, income from an ABLE account used for qualified disability expenses is not considered for SSI and Medicaid.

Assets available to an individual are considered when calculating asset limits.  For most SSI and Medicaid purposes, the limit is $2,000.  If there are “any circumstances” under which the Beneficiary may access the assets, then those assets are considered available.  A trust with a discretionary distribution standard is not considered an available asset.  Therefore, the assets in a Self-Settled Special Needs Trust are not counted.  Assets in an ABLE account are counted for SSI purposes only if they exceed $100,000, and for Medicaid eligibility purposes only if they exceed $511,758.

Transfers of assets are generally important in establishing eligibility for public benefits.  A transfer of assets to a Self-Settled Special Needs Trust is not penalized.  A transfer of assets to an ABLE account is not penalized either.  A transfer of assets to an ABLE account from a Self-Settled Special Needs Trust is not subject to a transfer of asset penalty.

New Jersey recently established New Jersey ABLE accounts. The website is NJ ABLE.[1]  NJ ABLE is a member of the National ABLE Alliance.  These accounts offer a number of investment options, and an FDIC insured checking option from Fifth Third Bank.  Investments can be aggressive, moderately aggressive, growth, moderate, moderately conservative, or conservative.

Opening an ABLE account is done online and supposedly takes about 15 minutes.  Assistance with the ABLE account is available either online or by phone.  Enrollment forms are available online. Contributions can be made through payroll direct deposits, if desired.  These are very modest ranging from 0.34% to 0.38%, depending on the investment option selected.  In addition, there is a $15 per quarter account maintenance fee.  This fee can be discounted by $3.75, if email is selected for delivery of statements and confirmations.  Contributions can be made by mail, by online bill paying, or by payroll direct deposit forms.