Special Needs Trusts vs. ABLE Accounts: Choosing the Right Path for Long-Term Support

If you are setting aside money for a child or another loved one with a disability, you may come across two options fairly quickly: a special needs trust and an ABLE account. Both can play an important role in protecting eligibility for certain public benefits, but they don’t work the same way.

One may offer more flexibility for everyday expenses, while the other may be better suited for managing a larger amount of money over many years. Depending on the circumstances, the right answer may be to use both.

What Is a Special Needs Trust?

A special needs trust allows money and other assets to be set aside for a person with a disability without generally affecting their ability to qualify for certain public benefits that have income or asset limits.

Rather than giving the money directly to the beneficiary, the assets are placed in a trust and managed by a trustee. The trustee is responsible for following the terms of the trust and deciding when distributions should be made.

For estate planning purposes, a third-party special needs trust is often particularly relevant. This type of trust is funded with assets belonging to someone other than the beneficiary, such as a parent or grandparent. For example, parents may include a special needs trust in their estate plan rather than leaving an inheritance directly to a child with a disability.

There are also first-party special needs trusts, which hold assets belonging to the person with a disability. These trusts have different requirements and rules. In California, the distinction can also affect what happens to remaining trust assets after the beneficiary dies. Since the rules can become complex, the type of trust and the source of the money should be considered carefully when developing a plan.

How Is an ABLE Account Different?

An ABLE account is a tax-advantaged account available to certain individuals with disabilities. Money in the account can be used for qualified disability expenses, including housing, education, transportation, health care, employment support, assistive technology, and other expenses related to living with a disability.

An ABLE account may also give the account owner more direct control over the money. With a special needs trust, the trustee manages the assets and distributions. An individual who is able to manage an ABLE account may have greater independence in deciding when and how to use the funds for qualified expenses.

ABLE accounts do come with eligibility requirements and contribution limits. Because of those restrictions, they may work well for certain expenses and amounts of money but may not be the best way to manage a larger inheritance or other substantial assets over the long term.

You May Not Have to Choose One

Special needs trusts and ABLE accounts do not necessarily have to be an either-or decision. An ABLE account does not replace a special needs trust, and depending on the circumstances, the two may serve different purposes within the same overall plan.

For example, a special needs trust might be used as part of an estate plan to provide for a child over the long term, while an ABLE account could provide another way to pay for qualified disability expenses. Whether using both makes sense will depend on the beneficiary’s circumstances, the assets involved, and the family’s goals.

Think About the Inheritance Before it is Received

One of the most important times to consider these options is before leaving assets directly to a loved one with a disability.

A well-intentioned inheritance can create unintended complications if the beneficiary relies on a public benefit program with financial eligibility requirements. Addressing the issue as part of your estate plan gives you an opportunity to decide how assets should be managed, who should oversee them, and how your loved one can receive additional financial support in the future.

It is also worth reviewing beneficiary designations on accounts such as life insurance policies and retirement plans. Even with a carefully drafted trust in place, assets that pass directly to the beneficiary may create complications for the overall plan.

Finding the Right Fit Within Your Estate Plan

An ABLE account may be enough in some situations. In others, a special needs trust may provide the longer-term structure a family wants. Some families may find that the two tools can serve different purposes within the same overall plan.

If you are creating or updating an estate plan and have a loved one with a disability, consider how an inheritance could affect their financial future and access to public benefits. The Estate Planning Law Office of Jonathon L. Petty, Inc. can help you explore the options available and determine how best to address your loved one’s needs as part of your overall estate plan. Call our offie at 559-374-2223 or complete our online contact form to schedule a conversation.