Special Needs Trusts vs. ABLE Accounts – Which is Better?

By Jeffrey Levine, IRA Technical Expert
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ABLE (Achieve a Better Living Experience) accounts are a brand new type of tax-favored savings account created to benefit young disabled persons. In order to have an ABLE account established for a person, they must be disabled (or blind), as defined by the tax code, and such disability (blindness) must have occurred before the person’s 26th birthday.

There’s a lot that’s been written about the rules for ABLE accounts, and a simple Google search will lead you to any number of articles that will provide that important information. But for those that understand the rules and are planning for a disabled person, one of the questions that has been asked with increasing frequency is, “Should I use a special needs trust or an ABLE account to safeguard my money [for my special needs beneficiary]?”

There’s no simple answer to this question, because it involves looking at a number of different factors, but below are 5 key areas to consider, along with a brief description of whether a special needs trust or an ABLE account gets the edge in that particular area.

  1. Amount that can be safeguarded without impacting benefits

Edge to special needs trusts – Unlimited amounts can be left/gifted to a 3rd party special needs trust without impacted federal/state benefits. On the other hand, SSI benefits will be suspended once an ABLE account’s value exceeds $100,000. In addition, there is no limit on the amount of funds that can be bequeathed/gifted to a special needs trust, whereas ABLE account contributions are limited to $14,000 (for 2015).

  1. Potential uses of funds

Slight edge to special needs trusts – While the definition of qualifying disability expenses for ABLE accounts is fairly liberal, special needs trusts drafted with the appropriate language can allow for an even broader array of expenses.

  1. Tax efficiency

Edge to ABLE accounts (big time!) – Any income that is generated by a special needs trust and not paid out of the trust to trust beneficiaries within the accounting year is subject to the brutal trust tax rates. In contrast, distributions from ABLE accounts, including earnings, will be entirely tax free if used for qualified disability expenses.

  1. Legacy to future beneficiaries

Edge to special needs trusts – Any amounts left in a person’s ABLE account at the time of their death will first be used to repay publically provided benefits. That will probably wipe out the balance in most of those accounts. In contrast, if a special needs trust is established and implemented properly, the trust assets at the time of the special needs person’s death can be left to other heirs.

  1. Cost and complexity

Edge to ABLE accounts – Trusts can be very expensive to create and administer. They also add a lot of complexity. ABLE accounts, on the other hand, will have minimal expenses and will be far simpler to implement. ABLE accounts are not required to file tax returns (like trusts are), and the income earned in the account will generally not be subject to income taxes.

So what’s better for you and your family? That is an issue best addressed with a qualified professional who specializes in planning for those with disabilities. However, determining which of these five key issues are important to you – and how important they are – will help you to make an informed decision.


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