Both ABLE accounts and special needs trusts (SNTs) can help people with disabilities (or their caregivers) to fund expenses without jeopardizing eligibility for critical public means-based benefits like Supplemental Security Income (SSI) and Medicaid. Compared to SNTs, ABLE accounts are easier to set up and manage. Also, the passage of SECURE Act 2.0 delayed the age by which an ABLE account must be established, from 26 to 46, beginning in the year 2026. This change makes ABLE accounts viable savings vehicles for a wider segment of the population. Below, we examine both SNTs and ABLE accounts, their key differences, and when it can make sense to use both.

Means-based benefits

Government programs are a foundation of financial support for many people with physical or mental impairments. Since unpaid medical bills are one of the leading causes of financial ruin, health insurance is often the most pressing need before or after a medical diagnosis of disability. Also, some individuals with disabilities face challenges in generating income on their own and depend on a variety of public benefits for income, food, and housing assistance.

SSI and Medicaid are means-based programs for low-income individuals with less than $2,000 in assets. For 2023, the maximum monthly federal SSI benefit is $914 per individual and $1,371 for an eligible individual with an eligible spouse.¹ Medicaid is not just health insurance; it can also provide waivers for residential or respite care. Meanwhile, Social Security Disability Insurance (SSDI) is sometimes available for people who suffer a disability before retirement age; after an individual receives SSDI for two years, they become eligible for Medicare coverage automatically. For example, if SSDI starts at age 33, Medicare eligibility starts at 35.

Most people are not eligible for means-based programs before 18, because eligibility for minors is based on the income and assets of their parents. After age 18, one challenge for some people who depend on public benefits is that any jump in income can undermine eligibility for means-based programs.

For example, suppose that a young person has received SSI and Medicaid for a few years when one of their parents passes away, leaving a $200,000 life-insurance benefit. Not only does the insurance payout disqualify the person with the disability from means-based programs but some of the life insurance payout could potentially be confiscated as a clawback of previous benefits paid. Proactive financial planning can sometimes help ensure that the person with the disability doesn’t lose benefits as the result of a life insurance payout or other asset transfer.

ABLE accounts

Created under the Achieving a Better Life Experience (ABLE) Act of 2014, an ABLE account is a tax-advantaged savings account that a disabled person can own without jeopardizing access to government programs, as long as the account’s value does not exceed $100,000. ABLE accounts are available to individuals diagnosed with disabilities before the age of 26 (with the age set to increase, in 2026, thanks to SECURE Act 2.0). Family members, the beneficiary, or friends can make contributions to the account. While contributions aren’t tax deductible, any returns generated within the account are tax-free, as are distributions to the beneficiary.

Qualified disability expenses (QDEs) from ABLE accounts are wide-ranging and don’t necessarily need to be disability-related. Section 529A(e)(5) of the ABLE Act lists the official rules and included QDEs: education, food, housing, employment training, transportation, assistive technology, health, and other expenses approved through IRS regulations.²

Special needs trusts

Before 2014, SNTs were the only way to transfer assets to an individual with a disability without undermining eligibility for means-based programs. Also called supplemental needs trusts or discretionary trusts, SNTs can sometimes help preserve continuity of financial assistance from means-based programs, while helping cover other expenses.

The first type of special needs trust is known as a third-party trust, created with assets provided by someone other than the beneficiary. The grantor provides ongoing support through the SNT; if the beneficiary passes, the assets go to another heir, without incurring a clawback of previous benefits paid. A master-pooled trust, which is typically run by a nonprofit, is sometimes an option for families without the resources to create a third-party trust on their own.

A first-party trust is funded with assets already owned by the beneficiary. In essence, the individual is giving up control of the assets to maintain eligibility for benefits, and any assets that remain after the beneficiary passes are subject to reclamation by the state. In the case of a large jury award, for example, the beneficiary might put the assets into a first-party trust to maintain eligibility for means-tested benefits.

Key differences

While ABLE accounts and SNTs can be used to pursue similar objectives, there are advantages and disadvantages associated with each.

• Eligibility: While ABLE accounts are available for those diagnosed before age 26 (age 46, starting in 2026), first-party SNTs can be established up until age 65. There are no age limits for establishing third-party SNTs.
• Limits on contributions: There are no limits on contributions to SNTs, but annual contributions to ABLE accounts are limited to $16,000 per year. States that manage ABLE accounts also set limits—often above $300,000, with only the first $100,000 exempt from impacting SSI eligibility.
• Costs: While ABLE accounts are relatively easy to open online, SNTs usually involve hiring an attorney and can be expensive to set up.
• Accessibility: Debit cards can offer quick access to funds in ABLE accounts, which typically isn’t the case for SNTs.
• Taxes: Special needs trusts have a hefty 39% tax rate for trusts with more than $9,000 in income annually, but income from ABLE accounts is tax-free.
• Permitted expenses: While QDEs from ABLE accounts are wide-ranging, SNTs are intended to provide quality-of-life improvements (like vacations, entertainment, pets, and healthcare) not covered under government means-based programs.

Government programs provide essential support to many people with physical or mental impairments, but the benefits are rarely sufficient to provide a decent standard of living. Using tools such as ABLE accounts and SNTs can sometimes help preserve access to means-based assistance while providing additional sources of financial assistance. In some situations, an individual might want to set up both: an ABLE account for short-term expenses and an SNT for larger purchases. If you’re not sure if either is right for you, please reach out to your Mercer Advisors representative for a consultation.