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An ABLE Account offers a tax-advantaged way to provide financial assistance to an adult with special needs without impacting the beneficiary’s eligibility for much-needed assistance programs. The funds held in an ABLE Account can be spent on qualified disability expenses (QDEs) such as transportation, assistive technology, health and wellness, and employment support. One advantage to creating an ABLE Account is that withdrawals are not taxed if the funds are used for a QDE. Moreover, the account can grow tax-free up to $100,000 without the account assets being considered when determining eligibility for SSI, Medicaid, and other assistance programs.
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To be eligible for an ABLE Account you must have a disability with an age of onset of disability before you turn 26 years of age. If you already receive SSI and/or SSDI benefits you are automatically eligible to establish an ABLE account. Otherwise, you must meet Social Security’s definition and criteria regarding functional limitations and receive a letter of disability certification.
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Once a child with special needs reaches adulthood, eligibility for important assistance programs such as Medicaid and Supplemental Security Income (SSI) will be based, in part, on the applicant’s income and assets. Making direct gifts to an adult with special needs, therefore, can inadvertently cause a loss of benefits. A special needs trust, however, allows you to make gifts to a beneficiary with special needs without jeopardizing eligibility for assistance. In addition, while an ABLE Account requires the age of disability to have occurred prior to the beneficiary turning 26, SNTs have no such age restriction.
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A first-party, or self-settled, special needs trust is established using assets owned by the person with special needs but must be established by the parent, grandparent, or guardian of the person with special needs or by a court. A self-settled special needs trust is most frequently needed when a disabled individual receives a lump sum of money, such as the result of a settlement for injuries in a personal injury accident. A third-party special needs trust is established by a third-party using assets of the third party for the benefit of a person with special needs. This type of special needs trust is most often established by a parent, or other family member, for the benefit of a child with special needs.
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Anyone, including the beneficiary, can contribute to an ABLE Account or a SNT. A beneficiary can contribute income to an ABLE Account through the Able to Work program.
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Contributions to an ABLE Account are made using post-taxed dollars and are not tax deductible for purposes of federal taxes. Some states, however, allow for state income tax deductions for contributions made to an ABLE account. The income earned by an ABLE Account, however, is not taxed. A self-settled SNT is a grantor trust. As such, trust income is attributed to the beneficiary regardless of whether it is distributed and must be reported on the beneficiary’s tax return. A third-party SNT is a non-grantor trust for tax purposes. Consequently, income retained by the trust will be taxed to the trust and only income distributed to, or used on behalf of, the beneficiary is taxed to the beneficiary.
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Contributions to an ABLE Account are limited to the current yearly exclusion limit which, as of 2023, is $17,000 per year. If the beneficiary is working, the ABLE to Work rules allow the beneficiary to contribute up to an additional $13,590 (as of 2023). Amounts held in an ABLE Account up to $100,000 are not included when determining eligibility for assistance programs such as SSI. If the account exceeds $100,000, SSI benefits will be suspended, and the excess funds will be considered as countable assets for other assistance programs such as Medicaid. In addition, the maximum ABLE Account limit in North Carolina is $450,000 (as of 2023). While the yearly exclusion limit applies to special needs trusts, there is no limit to the value of a SNT.
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You may only have one ABLE account; however, you can be the beneficiary of multiple Special Needs Trusts.
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A Letter of Intent, also referred to as a “Memorandum of Intent,” is an optional companion document to a Special Needs Trust. A Letter of Intent is where you will include important information that your Trustee should know about your child, such as your child’s abilities, routines, likes, and dislikes, and any interests they may have. You may also choose to include medical history, religious beliefs, and background information on your child’s upbringing. While a Letter of Intent is not a legally binding document, it can be a very valuable addition to an SNT because it provides guidance to the Trustee while administering the trust.
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Contact Us
If you have additional questions about special needs planning and your estate plan, contact the experienced special needs planning attorneys at Clarity Legal group by calling 919 484-0012 to schedule your free consultation.
