If you’re caring for an individual with disabilities, your estate planning priorities tend to look different than others. Your focus is on securing the financial future of your disabled loved one without impacting their ability to benefit from outside funding.
As a parent or caretaker, you need to consider their long-term care and other financial obligations—housing, transportation, food, and more. If you’re figuring out how to best care for someone with a disability after you’re gone, you may want to consider specific tools, like ABLE accounts and/or Special Needs Trusts (SNTs). Let’s look at the benefits and drawbacks of both.
What Are ABLE Accounts?
Introduced in 2014, an ABLE account, or Achieving a Better Life Experience account, is a savings account specifically designed to help individuals with eligible disabilities cover certain expenses. The individual with disabilities is considered the beneficiary of the account, and they can make contributions to it. Family members, friends, and others can also contribute to their ABLE account.
While contributions to ABLE accounts aren’t tax deductible, these accounts come with tax advantages for the beneficiary. Namely, funds in the account may grow tax-free, and distributions are tax-free as well—as long as they’re used for qualified disability expenses (QDEs).1
As part of the 2017 Tax Cuts and Jobs Act, the annual contribution limit for ABLE accounts was raised—though the limit could be reduced again once the Act sunsets at the end of 2025. Currently, the contribution limit mirrors the annual gift tax exemption limit. In 2024, for example, the ABLE contribution limit is $18,000.2
If the beneficiary is working, however, they may be eligible to contribute more money if they (and their employer) are not contributing to a retirement plan. If that’s the case, the beneficiary can contribute up to their annual compensation amount or $14,580, whichever is less.2
To qualify for an ABLE account, an individual must meet one of the following criteria:
- They’re eligible for Supplemental Security Income (SSI) because they were disabled before they turned 26.
- They’re eligible for certain benefits (disability insurance, childhood disability, or disabled widow/widower benefits) due to a disability that occurred before they turned 26.
- They have a certificate that proves their disability occurred before they turned 26.
Benefits of ABLE Accounts
Assets held in traditional banking or brokerage accounts are typically counted toward the income thresholds of public assistance programs or benefits—meaning if the individual has too high of a net worth or income amount, they don’t qualify. The significant advantage of having a dedicated account for individuals with disabilities is that the funds held won’t impact their eligibility for public benefits like SSI.
Because they’re offered through your state, ABLE accounts can be set up and managed right on your state’s website. This makes the process easy and quick, and it doesn’t require the help of an attorney or other professional. Plus, beneficiaries can access the funds easily when necessary, typically using a debit card connecting them directly to the account.
Considerations
The IRS does limit how much money can be contributed to an ABLE account each year, which may be frustrating for some individuals. In addition to the federal annual contribution limits, your state may also impose limitations.
States may set a maximum limit on how much money can be kept in the account. For example, most states impose a $300,000 maximum, and some will only exempt the first $100,000 from impacting SSI eligibility.
What Are Special Needs Trusts?
A Special Needs Trust (SNT) is a trust designed to hold and manage assets for a person with disabilities. As with other types of trusts, the assets held by the trust are afforded protection from creditors and may only be accessed by the designated beneficiary.
There are two types of SNTs:
- First-party: This is established by someone who has a qualifying disability (according to the SSA) and is under 65. The trust is funded with the individual’s assets.
- Third-party: There is no age limit for establishing a third-party SNT, and the trust is funded with assets contributed by other people, not the beneficiary.
Unlike ABLE accounts, SNTs have no contribution limits or account maximums.
Benefits
The primary purpose of establishing an SNT is to ensure an individual’s assets don’t count against them when qualifying for public assistance and benefits, which may otherwise be discontinued based on income or asset limits.
Because of the qualifications, more individuals are eligible to create an SNT than an ABLE account, making it a more widely accessible option. As we mentioned before, SNTs do not have contribution limits or account maximums.
Considerations
Like most other trusts, SNTs can be complex to set up and manage. Most people will need an attorney to help them through this process, which can get expensive.
Unlike ABLE accounts, the funds in an SNT may not be so easily accessible, as they’re meant to pay for extra expenses (travel, medical procedures, etc.), not basic living costs. The funds in an SNT do not receive special tax treatment either.
Which Option is Right for Your Family?
As we shared above, ABLE accounts and SNTs help individuals remain eligible for public assistance and benefits. However, their operations vary greatly. It’s not uncommon for disabled individuals and their families to incorporate both options into their financial plans.
For example, your adult disabled child may want to set up an ABLE account for everyday eligible expenses while you and your spouse establish an SNT on his behalf to use for larger purchases.
Creating long-term financial stability for a disabled loved one requires extensive planning and know-how. You should speak with a financial advisor experienced in navigating public benefits and helping families like yours find peace of mind.
To learn more about how we can help, book a call with our team today.
Sources:
1ABLE Accounts – Tax Benefit for People with Disabilities
2INFORMATION ABOUT TAX-FREE SAVING ACCOUNTS FOR DISABLED INDIVIDUALS
