Audit Disclosures: Why the Fine Print is Important

Special Needs Trusts and ABLE Accounts: When Are They Needed and Which Option is Best?

CPAs & Advisors

Shawn Davis
Shawn Davis CPA Manager CPAs & Advisors

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Special Needs Trusts

A Special Needs Trust (SNT) is a type of trust set up for a person (beneficiary) with a mental or physical disability or limitation. SNTs are designed to supplement any public benefits they receive, such as Medicaid, without disqualifying them for those benefits. A trusted individual, usually a family member, serves as a trustee and has discretion over the use of the funds for the individual. The trust can be either a self-settled first-party or a third-party-funded trust. 

A third-party-funded SNT is created with assets that do not belong to the beneficiary. The beneficiary may be disabled, vulnerable, incarcerated, or just unable to manage money. There are no age restrictions to this type of trust or payback provisions, which will be discussed later. The assets in this type of trust are not countable assets for “needs-based” public benefits and pass to successor beneficiaries when the original beneficiary passes away. This type of trust is an ideal way to provide assets to improve the quality of life of a qualified individual as it has fewer restrictions and more discretion than a self-settled first-party SNT. This type of trust is often created as part of a parent or grandparent’s estate plan for their disabled child.

A self-settled first-party SNT is created with assets that belong to or are payable to the beneficiary of the trust. This type of trust requires the beneficiary to be under age 65 and disabled as defined by the Social Security Act (SSA). The trust is usually established by a parent, grandparent, guardian, or Court for the sole benefit of the disabled individual. A Medicaid payback provision must be present in the trust stating that the State will receive all remaining assets in the trust at the beneficiary’s death up to the total amount of assistance paid under the State Medicaid plan. This type of trust must be discretionary and irrevocable. 

Achieving a Better Life Experience (ABLE)

ABLE accounts are another option. These accounts are modeled after Section 529 education plans and allow beneficiaries to open their own account. The balance of the investment account, up to $100,000, is not a countable resource for “needs-based” public benefits. These accounts are less complicated to implement than a SNT, but also have greater restrictions. 

  • Beneficiaries must be disabled as defined by the SSA before age 26, and each beneficiary may have only one ABLE account.
  • Contributions to the account are limited to the annual gift exclusion, currently $15,000, from all sources plus beneficiary earnings up to the federal poverty level, currently $12,060.
  • Supplemental Security Income is lost if the account exceeds $100,000, so care must be taken to monitor the current balance.

Like section 529 education plans, contributors in Michigan can receive a $5,000 deduction on their state taxable income for contributing to a MiABLE account, which can save a Michigan taxpayer more than $200 in taxes. ABLE accounts must be used for “qualified disability expenses” and are subject to the same payback provision that self-settled first-party SNTs are.

Which Option is Best?

The options listed above each have pros and cons that fit different situations and should be considered carefully. If a beneficiary already has funds available, they should consider either a self-settled first-party SNT or an ABLE account, depending on how much money they have. If a family member is looking to gift or bequeath an amount of money to a beneficiary, it would be a good idea to gift or bequeath it directly to a third-party-funded SNT rather than to the individual. A beneficiary who works and would like to save for a house or car without disqualifying for their “needs-based” public benefits could use an ABLE account to put away over $12,000 a year. 

Yeo & Yeo’s Trust and Estate Services Group can help you evaluate the options to best serve your situation. Please reach out to us at 800.968.0010.

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