We as a society often leave people with disabilities and special needs out of financial conversations. This is a gross oversight from the world of personal finance. First of all, people with disabilities can and do manage their own money. Moreover, they may also have family members and others involved in their money management. Everyone dealing with the individual’s money must have a strong understanding of the unique options available to people with disabilities. When it comes to saving for the future, there are two similar account types to consider: ABLE accounts and Special Needs Trusts. This article explores the pros and cons of each of them, highlighting the reasons why ABLE accounts are often the better option.
What Are ABLE Accounts and Special Needs Trusts?
The Special Needs Alliance explains that both ABLE accounts and Special Needs Trusts are savings tools for people with disabilities. Moreover, both types of accounts allow those individuals to save (and use) money without compromising their eligibility for public programs such as Medicaid and Social Security. This is a very important point. People on fixed or limited income sometimes compromise access to important programs by making financial mistakes. These accounts empower individuals to save money without taking away their rights to those critical services.
ABLE Accounts Offer Maximum Empowerment to the Individual
One of the critical differences between ABLE accounts and Special Needs Trusts is regulation about who can create and manage the account. In both cases, the individual with a disability is the person who is the beneficiary of the savings account. In both cases, that beneficiary typically plays a role in setting up the account. However, the degree of involvement, particularly in managing the funds, varies.
Who Creates and Manages ABLE Accounts
ABLE accounts empower the individual to create and manage their own account. Of course, individuals with disabilities are each unique; sometimes the beneficiary will need assistance. Based on the beneficiary’s capacity, they may get assistance with setting up and/or managing the account from any of the following people:
- Parents, even if the individual is an adult
- The beneficiary’s official guardian or conservator (who may or may not be the parents)
- An assigned power of attorney
Anyone is allowed to contribute to ABLE accounts but the individual is generally highly involved in these.
Who Creates and Manages Special Needs Trusts
Special Needs Trusts are a bit different in that there are two types: first party and third party. Setting up a first party Special Needs Trust is similar to setting up an ABLE account. The beneficiary can set up the account. Alternatively, these people could set it up:
- Their parents
- Their grandparents
- The beneficiary’s official guardian or conservator
- The court system
These people can also set up a third party Special Needs Trust. In fact, anyone except the beneficiary themselves can set up this type of trust. (Basically, a first party trust utilizes the individual’s own funds whereas a third party trust utilizes someone else’s funds.) However, regardless of who sets it up and whether it’s a first or third party account, the Special Needs Trust is managed by a designated trustee.
Which Option is Better?
The individual with special needs should have the right and ability to participate in their own financial decisions to their greatest ability. Therefore, if they are able to set up and manage an account on their own, then they should have that option. If they are able to create an account and manage it mostly on their own with some assistance, then they should have that option. We want people to be as empowered as they can with their finances. For example, people can make investments utilizing either type of account but with a Special Needs Trust, the designated trustee will always make those decisions, whereas ABLE accounts often allow the beneficiary to have more say.
Due to this, ABLE accounts are often the better option. They typically give the individual with disabilities the maximum power to control their finances. Special Needs Trusts, especially third party Special Needs Trusts, offer less control to the individual. That said, if a person isn’t able (or doesn’t want to) manage their savings themselves, then it would be necessary to take other factors into consideration to determine whether ABLE accounts or Special Needs Trusts are the best option for that specific person.
Additional Benefits of ABLE Accounts
Maximum ability of the individual to control their savings is a major benefit of ABLE accounts as compared with many Special Needs Trusts. Of course, there are other benefits as well. Here are some of the key reasons that someone might select an ABLE account:
ABLE Accounts Are Less Expensive
Remember that Special Needs Trusts require a designated trustee to manage the account; you have to pay that person. As a result, ABLE accounts are usually a more affordable option. ABLE accounts may incur small banking fees. However, the fees are minimal. Moreover, you can start saving in an ABLE account with a very limited initial amount whereas you may need more money to set up a trust.
ABLE Accounts are Simpler
There is a reason that a designated trustee is involved with Special Needs Trusts; they are complicated. In fact, there are even more different types of Special Needs Trusts than the first and third party options described here. For example, pooled and non-pooled Special Needs trusts are two types. In other words, there are a lot of factors to take into consideration with both setting up and using these accounts.
In contrast, ABLE accounts are much simpler. You can typically set one up online in under an hour. Managing them is fairly straightforward. If you’re seeking savings with ease of use then ABLE accounts are the better option.
ABLE Accounts Often Have Better Tax Benefits
Both types of accounts have complicated tax issues. Therefore, it’s important to look closely at your unique situation to determine which is best for you. That said, generally speaking, ABLE accounts are not taxed by the federal government. Moreover, if a third party (such as a parent) contributes to the ABLE account, they may receive a small tax benefit themselves (using the federal annual gift tax exclusion). In contrast, Special Needs Trusts are generally considered taxable income.
It’s important to understand that individuals receiving SSI or Medicaid typically don’t earn enough money for this to be a huge issue. Nevertheless, it’s an aspect to consider when choosing between the two accounts.
Gifts and Winnings Are Well-Suited to ABLE Accounts
Let’s say that an individual’s uncle dies and leaves them $10,000 as an inheritance. Or let’s say the person plays the lottery and wins that same amount. Or for that matter, let’s say that the individual has been working and earns more than would typically be allowed as savings under the rules of SSI. In any of those cases, the money can compromise access to those important public aid programs. Setting up an ABLE account for those funds can help protect the individual. The individual would still have maximum control of their funds.
ABLE Accounts Can Pay for Housing
This is a very important benefit of ABLE accounts as compared to Special Needs Trusts. With an ABLE account, you ca use the funds to pay for housing without compromising your access to SSI funds. In contrast, if you use Special Needs Trust funds for housing, the amount you use gets deducted from your SSI (so you don’t receive that SSI funding.)
ABLE accounts are, in some ways, simpler than Special Needs Trusts. In fact, the Special Needs Alliance goes so far as to say “an ABLE account is not a substitute for comprehensive SNT planning.” There are many things that make this type of account the best choice. However, there are some important considerations that you want to look at in case a Special Needs Trust is the better option for your unique situation. Those considerations include:
- ABLE accounts require that the disability began prior to the age of 26. There are fewer (and sometimes no) age restrictions on Special Needs Trusts.
- A person is only allowed to have one ABLE account. Plus, there are restrictions on how much money you can put in the account. In contrast, you can have multiple Special Needs Trusts without the same financial caps.
- You can use ABLE accounts to pay for anything related to improving the health, quality of life, and/or independence of the individual (which includes housing as discussed above.) This covers most expenses. However, you can use a Special Needs Trust to pay for anything that’s for the beneficiary, without having to consider whether or not it improves their life in some way. Depending on a person’s interests and common expenditures, there are some instances in which the Special Needs Trust would make more sense.’
- There is a situation called Medicaid Payback which means that funds leftover in an ABLE account or a first party Special Needs Trust may sometimes require repayment to the state upon the individual’s death. In contrast, Special Needs Trusts require no such payback. If a person is likely to have a lot of funds remaining after death, the third party trust might make more financial sense for the family.
Ultimately, there are a lot of things to take into consideration when setting up savings accounts, particularly when you also have to factor in the impact on SSI and Medicaid. ABLE accounts are often a top choice. However, special needs attorneys are available to help individuals make the best decision for their unique circumstances.