ABLE Account vs. Special Needs Trust: Key Differences Explained

Understanding the financial tools available for individuals with disabilities is crucial for ensuring long-term financial security and independence. Two primary options often considered are ABLE accounts and Special Needs Trusts, each offering distinct benefits tailored to different circumstances.

While both aim to provide financial support without affecting eligibility for assistance programs, they differ significantly in structure, control, and tax implications. Examining these differences can help families determine which option best meets their needs.

Eligibility Requirements

ABLE accounts, established under the Achieving a Better Life Experience Act of 2014, are designed for individuals with disabilities that onset before age 26. To qualify, the individual must either receive Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) or have a physician-certified disability.

Special Needs Trusts, on the other hand, have no age restriction, making them accessible to individuals whose disabilities occur later in life. These trusts can be created by a third party, such as a family member, or by the individual themselves.

The key distinction here is age. ABLE accounts cater to younger individuals with early-onset disabilities, while Special Needs Trusts offer greater flexibility for those with disabilities diagnosed later.

Relation to Assistance Programs

Both ABLE accounts and Special Needs Trusts are designed to safeguard eligibility for critical government benefits like Medicaid and SSI.

ABLE accounts allow individuals to save without jeopardizing SSI benefits as long as the account balance stays below $100,000. Amounts exceeding this threshold may temporarily suspend SSI benefits, but Medicaid eligibility remains unaffected. Contributions, capped at $17,000 annually for 2024, align with federal gift tax exclusions.

Special Needs Trusts provide a more flexible structure. Funds in these trusts are excluded from SSI and Medicaid resource calculations, regardless of the amount. This makes them an attractive option for individuals with substantial assets or financial settlements. However, the trust must comply with specific rules, such as being irrevocable and granting the trustee discretion over disbursements.

Funding and Disbursement

ABLE accounts can be funded by contributions from family, friends, or the beneficiary, up to the $17,000 annual limit for 2024. They also allow rollovers from 529 college savings plans, offering additional flexibility.

Special Needs Trusts accommodate larger sums without annual limits. They can be funded through inheritances, settlements, or life insurance proceeds. The type of trust—first-party or third-party—determines certain obligations. First-party trusts, funded with the beneficiary’s own assets, require Medicaid payback upon the beneficiary’s death, while third-party trusts do not.

Disbursements from ABLE accounts must align with IRS guidelines for qualified disability expenses, such as education, housing, and healthcare, to maintain tax advantages. Special Needs Trusts, managed by a trustee, offer tailored disbursements for supplemental needs like travel or therapies, provided they don’t count as income that could affect benefits eligibility.

Ownership and Control

ABLE accounts empower the beneficiary to manage the account independently, allowing them to make decisions about contributions and disbursements. However, funds must be used for qualified expenses to retain tax benefits.

Special Needs Trusts are overseen by a trustee, who ensures funds are used appropriately and in the beneficiary’s best interest. This structure is beneficial for individuals who may need assistance managing their finances. The trustee’s role includes adhering to the trust’s terms and legal standards.

Qualified Uses of Funds

The IRS broadly defines “qualified disability expenses” for ABLE accounts, including categories like education, housing, healthcare, and transportation. Misuse of funds can result in tax penalties, including income tax on earnings and a 10% penalty.

Special Needs Trusts cover similar expenses but often focus on supplemental needs not addressed by government benefits, such as recreational activities or specialized therapies. Trustees must ensure disbursements do not provide direct cash to the beneficiary, which could be treated as countable income.

Tax Considerations

Tax implications are a key factor in choosing between an ABLE account and a Special Needs Trust.

ABLE accounts are tax-advantaged savings tools under Section 529A of the Internal Revenue Code. Contributions are made with after-tax dollars and grow tax-free, and withdrawals for qualified expenses are tax-exempt. Some states offer additional tax benefits; for example, Ohio residents can deduct up to $4,000 per contributor, per beneficiary, annually from state income taxes.

Special Needs Trusts are subject to more complex tax rules. Trust income is taxed at the trust level, often at higher rates than individual brackets. In 2024, trusts reach the highest federal income tax rate of 37% at just $14,450 of taxable income. However, distributions for the beneficiary may shift the tax burden to the individual, likely in a lower tax bracket. Third-party trusts avoid Medicaid payback provisions, preserving assets for heirs and offering estate planning advantages.