The majority of people with disabilities will require government help like Supplemental Security Income and Medicaid due to the exorbitant costs of care and support, which are frequently more than $100,000 a year.
They must, however, carefully protect their assets in order to be eligible for these programmes. Special needs trusts and ABLE accounts can help with that.
Explanation of special needs trusts
In special needs trusts, there are two variations:
Third-party: Third-party SNTs are frequently utilised by people who are anticipating the requirements of a loved one with special needs. A third-party SNT is typically established by the beneficiary’s parents, however it can also be done by a grandparent, a sibling, or any other person (other than the beneficiary). This is true even if the beneficiary is not the person with special needs or a disability.
First-party: When a person with a handicap receives an outright inheritance of money or property or obtains a court settlement, first-party SNTs are most frequently used. These SNTs are particularly helpful in the event that a person without a history of disability holds assets in their name and then develops a disability and wants to be eligible for public benefits with an asset or income requirement.
According to Mike Walther, a certified financial planner and the owner of Oak Wealth Advisors in Northbrook, Illinois, special needs trusts cannot be used to pay for some essential expenses that are covered by government programmes. These include housing costs, which are paid by SSI, medical costs, which are covered by Medicaid, and groceries, which are covered by the Supplemental Nutrition Assistance Program.
Because not all costs associated with these categories are covered by government programmes, ABLE accounts can be utilised to make up the difference.
ABLE accounts: What are they?
A tax-advantaged savings account for people with disabilities is known as an ABLE account. The account can be used to save for qualified disability expenses, which can include education, housing, transportation, and more. Contributions to an ABLE account are not tax-deductible, but withdrawals are tax-free as long as they are used for qualified expenses. Contributions must come from the individual or from another person on behalf of the individual (either directly or through a third party).
According to Michael Beloff, partner and Chartered Special Needs Consultant at Belvedere Wealth Partners in Stamford, Connecticut, these can pay for everything that is for the benefit of the individual, including a computer, communication devices, education, training, financial management, support services, assistive technology, meals (restaurants, prepared foods), basic housing expenses (rent, mortgage payments, basic utilities), and more.
According to current federal legislation, a trustee may transfer funds from a special needs trust to an ABLE account in order to pay for a person’s expenses. The ABLE fund balance can be claimed by Medicaid once a Medicaid recipient passes away, much like a first-party trust.
“Not all states have ABLE accounts, but people from those states can open one in states where non-residents are allowed,” Walther said. “And it’s OK to shop around.”
According to Italiano, one key advantage of an ABLE account over a typical checking account is that it permits the holder to amass more than $2,000 without risking means-tested benefits.
Owners of ABLE accounts have the option of investing their money or keeping it in cash. According to Beloff, each state has a contract with an investing firm and offers a variety of investment mixes.
“ABLE accounts are great tools for an individual with a disability to manage funds, but they are not a replacement for a special needs trust,” he said.
“This is because you can contribute only $16,000 [in 2022] per year to the ABLE, but the majority of parents leave more than that” in inheritance, Beloff added. “Therefore, they need a different vehicle [with no contribution limit] to house the money.”