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supplemental needs trust

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By Nancy Burner, Esq.

Nancy Burner, Esq.

QUESTION: I recently heard about the concept of an ABLE account. Is this something that I should explore for my disabled child?

ANSWER: There are several planning techniques that you can take advantage of to protect assets on behalf of your child with special needs. ABLE accounts are tax-advantaged savings and investment accounts for disabled individuals. ABLE accounts were created under the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014, known as the ABLE Act. The Act recognizes that living with a disability can be costly. 

Before exploring ABLE accounts, it is important to understand the different options available when planning for a disabled child’s future. At the outset, Supplemental Needs Trusts, also known as Special Needs Trusts (“SNT”), are often used to protect assets for disabled individuals.  Assets and income in an SNT can be used for a disabled individual’s benefit without disqualifying them for benefits.  A properly drafted SNT enhances the quality of life of a person with disabilities without interfering with any government benefits, such as Supplemental Security Income, Medicaid, FAFSA, HUD and SNAP/food stamp benefits.

Generally speaking, there are two categories of Supplemental Needs Trusts: a First-Party SNT and a Third-Party SNT. A First-Party SNT protects assets that belong to the disabled individual (e.g., a personal injury award). A Third-Party SNT is funded for the benefit of the disabled person using the assets of someone other than the disabled individual (e.g., an inheritance from a parent). An important difference between the two trusts is the distribution of assets upon the death of the disabled person. Specifically, a First-Party SNTs must pay back any monies paid by Medicaid during the disabled person’s lifetime. In contrast, a Third-Party SNT does not have to pay back Medicaid.

The creation of an ABLE account is an important step forward for special needs planning. An ABLE Account can be used on its own or in conjunction with a Supplemental Needs Trust. To be eligible for an ABLE account, a person must have a qualifying disability that was present before the age of 26, with one of the following: 

◆ Classified as blind (as defined in the Social Security Act);

◆ Entitled to Supplemental Security Income or Social Security Disability Insurance because of the disability; 

◆ Have a disability that is included on the Social Security Administration’s List of Compassionate Allowances Conditions; or

◆ Have a written diagnosis from a licensed physician documenting a medically determinable physical or mental impairment which results in marked and severe functional limitations, that can be expected to last for at least a year or can cause death.

An ABLE account can be created by the disabled individual, parent, guardian, or power of attorney. ABLE accounts provide a simple, tax advantaged way to save and pay for disabled individuals’ qualified expenses without jeopardizing eligibility for critical government benefits. Some examples of qualified expenses include housing, transportation, education, assistive technology, and legal fees. If the ABLE account is used for non-qualified expenses, the individuals do not lose eligibility. Instead, the earnings portion of the withdrawal is treated as income and is subject to federal and state taxes, as well as a 10% federal tax penalty.

Importantly, total annual contributions to ABLE accounts cannot exceed the federal annual gift tax exclusion ($15,000 in the year 2021). Up to a certain amount, the money in an ABLE account will not interfere with Supplemental Security Income (“SSI”) or Medicaid benefits. However, there are limitations for individuals receiving SSI. Specifically, when an ABLE account balance over $100,000 exceeds the SSI resource limit (on its own or combined with other resources), the SSI payments are suspended. SSI resumes when the countable resources are again below the allowable limit. Medicaid benefits remain unaffected. 

Similar to the above mentioned First-Party SNT, when an ABLE account beneficiary dies, there is a payback to Medicaid for Medicaid-related expenses. This payback exists regardless of who made contributions to the ABLE account.

Creating and funding an ABLE account can provide a disabled person with a sense of autonomy, while preserving government benefits.  Questions about setting up and managing an SNT, or an ABLE account, should be directed to an experienced estate planning attorney who practices special needs planning.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.