Many families help their disabled loved ones with whatever resources they have, if they can, but this help must be done carefully to protect eligibility for government aid, reports a recent article titled “Here’s how ABLE accounts, special needs trust differ…and how they can work together” from CNBC. An ABLE account—named for the Achieving a Better Life Experience Act—can be paired with Special Needs Trusts to improve the quality of life for the disabled family member.
How do Special Needs Trusts work?
The two types of Special Needs Trusts are Third-Party and First Party trusts. The Third-Party Trust is funded by parents or others and is only for the disabled person’s needs. When the parents pass, the funds go to someone else. A First Party Trust is created with the disabled individual’s funds. It is used to shelter any income earned or inherited to maintain their eligibility for Medicaid, which has income and asset limits. The trustee must approve any distributions from the First Party Trust. After the death of the disabled individual, Medicaid will make a claim on any funds in the First Party Trust.
Special Needs Trusts (SNTs) may not be used for certain expenses paid for by government programs, including groceries, medical costs covered by Medicaid, and housing expenses, which are covered by Supplemental Security Income (SSI).
Expenses not covered by government programs can be paid from ABLE Accounts. The ABLE account is a tax-advantaged saving account similar to the 529 accounts used for college savings. Funds may be used for expenses that maintain or improve the individual’s health, independence, or quality of life. Funds can be used for education, recreation, personal technology, and more.
After the recipient’s death, Medicaid can claw back funds from the ABLE account.
There are requirements and limitations to the ABLE account. In 2022, only $16,000 may be contributed per year. Most parents leave more than this amount for their disabled children, so a different vehicle is needed for inheritance.
Here’s where it gets interesting: A trustee for an SNT can make a distribution to the ABLE account to help cover expenses not permitted to be paid from the Trust.
An estate planning attorney can help the family plan for the present and the future by using these and other strategic planning tools for a disabled individual.
Reference: CNBC (June 30, 2022) “Here’s how ABLE accounts, special needs trust differ…and how they can work together.”