Beyond the Basics of Special Needs Planning Part 2: Recent Updates
Keith A. Stevens
The biggest change in special needs planning in the last five years has been the arrival of the ABLE account. Created by federal law in 2014, ABLE accounts combine features of Special Needs Trusts, 529 college savings plans, and checking accounts to provide an additional, self-directed means of exempting resources for a disabled individual. From this alchemy, ABLE accounts emerge as a valuable planning tool with remarkable flexibility tempered by strict limitations.
ABLE accounts are meant to be less complicated alternatives to Special Needs Trusts that also empower disabled individuals to take more control of their own finances. Funds held in an ABLE account do not count toward asset limitations for Medicaid or SSI purposes. The disabled beneficiary establishes and owns the ABLE account, and may access the funds directly. Like a 529 college savings plan, growth in an ABLE account is tax free to the extent that the funds are for qualified disability expenses (that is, anything that touches on, or is effected by the owner’s disability).
To be eligible for an ABLE account, an individual must have a disability that occurred prior to age 26. ABLE accounts are administered subject to a central plan created by the state. It is not necessarily required to be a resident of a certain state to take advantage of its ABLE plan. In Ohio, the accounts are known as STABLE (State Treasury ABLE) accounts.
To open a STABLE account, you must complete an application with the State Treasurer’s website. Once the account has been set up, you may choose between five different investment options, with varying levels of risk and market exposure.
ABLE Advantages vs. Trust Planning
ABLE accounts feature three major advantages over traditional special needs planning: (1) the plan is preapproved by Medicaid and SSI, (2) the disabled owner may access funds directly, and (3) there is greater flexibility for which the funds may be used. It is not necessary to draw up a new trust document each time and roll the dice for how the Social Security Administration will interpret it. ABLE accounts may also make distributions that trusts may not – namely for food or shelter.
However, ABLE accounts are not a panacea. They may only hold cash, and their investing power is limited; there is a potentially stifling aggregate contribution cap of $15,000 per year total (regardless of the number of contributors, but with an additional amount available for wages); and they must pay back Medicaid for money spent upon the owner’s death. These limitations may discourage funding by a third party, especially compared to using a supplemental or discretionary trust. ABLE accounts are unsuited for a third party wishing to transfer non-cash assets, such as a home, to the disabled individual.
Of course, special needs planning is not a zero-sum game. While an ABLE account is not appropriate for everything, it may nicely compliment a third-party trust, and vice-versa. If the family wants to give the disabled individual a large amount of funds or illiquid assets, such as real estate or stock, the best vehicle is still a third-party trust, as there are no limits to type or amount of assets.
The ABLE account is also an excellent tool for disabled individuals who are working to save some of their wages, particularly for bigger purchases. An individual on disability benefits may own a vehicle, but previously could only save for that vehicle through a Special Needs Trust. The ABLE account allows the beneficiary to save up funds without having to get a third party involved, and without having to risk the SSA’s approval. Planners, therefore, should continue to keep this additional tool in mind, even if it does not fully replace other planning instruments.
Special Needs Trust Fairness Act
Another recent change fixed a long-standing point of frustration with Special Needs Trusts, vehicles used to hold assets for a disabled beneficiary without disqualifying them for Medicaid or SSI, subject to payback at death. As originally passed in 1993, 42 USC 1396p(d)(4)(A) vested the power to create Special Needs Trusts solely in the beneficiary’s parents, grandparents, or guardians, or else with a court.
Nearly twenty-five years later, Congress fixed its oversight with the Special Needs Trust Fairness Act signed by President Obama in December 2016. The Act amended 42 USC 1396p(d)(4)(A) by empowering the disabled individual to establish a Special Needs Trust himself or herself. This is a minor change to the law that makes things substantially easier for the disabled individual, the family, and the planner.