Every family has its own unique mix of financial goals and challenges. For families that include a person with disabilities, the process can be especially complex, the questions nerve-wracking and the implications of getting the planning wrong huge and worrisome.
We come across situations like Ann and George Kerner, who have two teenage daughters and a 20-year-old son, Robert. Robert has an autism spectrum disorder and will not be able to earn a livable income. Beyond the standard tax and finance matters, the Kerners are concerned with questions such as: How can we supplement the Supplemental Security Income (SSI) Robert receives? Who will help monitor his wellbeing when we no longer can? Must his sisters be burdened with the responsibility for managing his finances?
Or people like Ellen and Nick Shea, who have one child—a 33-year-old daughter, Christy, who has bipolar disorder and can only work periodically. Ellen and Nick are concerned with ensuring that Christy has money to live on when she can’t work, and they wonder if their periodic financial support will jeopardize her access to SSI or Medicaid.
These families are often unaware of the options available to them. As a result, they may be prone to make financial mistakes—thinking all the while that they have made the best possible arrangements for their loved one (i.e., an inheritance or life insurance payment of just $2,000 can jeopardize the person’s eligibility for Medicaid, SSI, and housing assistance). Many other families find that long-term planning takes a back seat to day-to-day needs.
Families want to accomplish two central goals: Find a vehicle that enables them to provide long-term financial support for loved ones unable to support themselves; and ensure that the support will supplement—not replace—benefits available from public programs such as Medicaid, SSI and housing assistance. There are two specific vehicles for providing financial security for disabled individuals: Pooled Special Needs Trusts and ABLE accounts.
Pooled Special Needs Trusts
A special needs trust (SNT) is a legal vehicle that enables money to be set aside for a person with a disability. It is intended to help preserve the funds for the individual, while protecting his/her access to public benefits. A SNT can be created by or for any person who has a serious disability, as defined in Social Security Administration guidelines. These guidelines include people with a wide variety of physical, developmental, and mental conditions, such as (but not limited to) Alzheimer’s, autism spectrum disorders, schizophrenia, multiple sclerosis, heart disease, diabetes, vision loss and depression.
A trustee is responsible for managing and disbursing the SNT’s funds. Disbursements can pay for goods and services that solely benefit the disabled person, including necessities not covered by public benefits—such as unreimbursed medical and dental care, haircuts, clothing, household items and personal care needs. They also can cover purchases that enhance a person’s life—such as books and magazines, movies and electronics. However, trust assets cannot be used for gifts for other people; and there are restrictions for SSI beneficiaries on payments for rent, food, utilities. A skilled trustee should know and adhere to the rules related to what benefit the beneficiary may be receiving.
So long as the funds are used for qualified purposes that solely benefit the disabled person, the trust’s assets are not counted toward eligibility for Medicaid, SSI or other public benefits. And, while investment gains are taxable, trust distributions are not considered taxable income for the beneficiary.
Another benefit of the SNT: It does not have to be funded at the time it is created—so that families without current assets to fund the trust can direct future life insurance payouts, inheritances, or other anticipated assets directly to it, protecting the beneficiary’s eligibility for public benefits.
There are costs associated with setting up and maintaining a SNT. They include the attorney’s fee for creating the trust document; ongoing investment management fees; and, often, a fee for the time the trustee spends monitoring the beneficiary’s needs and making disbursements. Further, investment managers are unlikely to administer trust investment accounts without an initial deposit of at least $500,000.
However, there is a less expensive, less complicated option: Pooled Special Needs Trusts. Given legal status by Congress in the 1990s, Pooled SNTs are maintained by dedicated nonprofit organizations that manage separate accounts established for individual beneficiaries—which are all “pooled” for investment purposes only. Pooling of individual accounts reduces start-up fees and ongoing administrative costs; and there is no profit margin for the trust administrator, because Pooled SNTs can only be run by nonprofits. Each individual beneficiary has their own sub-account and only their funds will be used for their purchases. Finally, Pooled SNTs can be established as either “First-Party” or “Third-Party” trusts—the former established with the beneficiary’s own assets; the latter using assets provided by other people; and individuals can simultaneously be beneficiary of both kinds of trusts.
Many families find a Pooled SNT simpler to use and less expensive than an individual SNT. They also find two non-financial advantages to Pooled SNTs: the nonprofit sponsor serves as trustee, relieving family members of the need to find (or serve as) the trustee; and with PLAN as the sponsoring organization, licensed social workers on staff who coordinate services. The service coordinators along with PLAN’s trust officer and trust coordinators support and advise beneficiaries and their families on a continuing basis. An experienced, compassionate trustee not only serves the beneficiary, but also brings peace of mind to their families.
In 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act, which created tax-preferred savings accounts into which individuals with disabilities could make deposits without taxation and without jeopardizing their eligibility for Medicaid and SSI. Modeled on 529 college-savings plans, ABLE accounts can be used to pay for qualified expenses like those described for SNTs. To qualify for an ABLE account, an individual must have become disabled before age 26.
While ABLE accounts are based on federal legislation, they are managed on a state-by-state basis. In Massachusetts, ABLE accounts are administered by the Massachusetts Educational Financing Authority and are called The Attainable Savings Plan™. You can only have one ABLE account. Annual deposits (from all sources) into an ABLE account can total up to the federal gift exclusion amount which is $16,000 for 2022. Yet the lifetime total that can be accrued is equal to the cap on the state’s 529 plans, currently $400,000. While Medicaid eligibility is preserved up to cap level, SSI payments are suspended during any period in which the account exceeds $100,000.
As with SNTs, qualified distributions from ABLE accounts are not considered taxable income. But there are important distinctions between ABLE accounts and SNTs. ABLE accounts should be lower cost to create and maintain and not require extensive set-up and maintenance documentation. Earnings in the account grow tax deferred. In addition, competent beneficiaries are permitted to disburse the funds themselves; they do not have to give up control to a trustee. Plus, ABLE accounts are not subject to certain SSI-related limitations on housing payments.
On the other hand, each person can benefit from only one ABLE account, while there is no limit on the number of SNTs that can be created for an individual. SNTs have no caps on annual contributions or on total accrued assets, whereas the ABLE accounts caps discussed above make them inappropriate for use with lump-sum funding, such as payouts from life insurance, inheritances, or legal settlements. SNTs are not limited to individuals who have become disabled before age 26, as are ABLE accounts. Finally, there is a burden on ABLE account owners to ensure that distributions fully meet the complex rules on qualified disability expenses; and for people whose disability may make them vulnerable to financial exploitation, the ABLE account may not be a safe choice.
There are advantages and disadvantages with each vehicle. But ABLE accounts and SNTs are not mutually exclusive. SNTs can fund an Able account up to the annual federal gift exclusion for that year. Some beneficiaries will be best served by using both vehicles.
Planned Lifetime Assistance Network of Massachusetts and Rhode Island, Inc. (PLAN) is an example of a nonprofit organization created specifically to establish and administer pooled SNTs. PLAN runs the oldest and largest pooled trust in New England; and its team of licensed social workers, attorneys, and investment experts help beneficiaries protect their eligibility for public benefits, while preserving their assets and enhancing the quality of their lives. Organizations such as PLAN are happy to help individuals and families learn more about pooled special needs trusts; and they are committed to helping family members feel confident that there is a knowledgeable and experienced team monitoring their loved one’s financial security and general well-being. For more information on PLAN’s services, go to http://planofma-ri.org or call (617) 244-5552.
Planned Lifetime Assistance Network of Massachusetts and Rhode Island, Inc. (PLAN) is a 501(c)3, nonprofit organization that administers special needs pooled trusts for individuals with special needs and offers professional and compassionate guidance to them and their families.
PLAN of MA and RI is a separate entity from AANE and solely responsible for the above content. Any questions or inquiries concerning this content should be directed to PLAN.