Special Needs Trust

Theodora Iwuchukwu has an adult son whose qualifying disability began in childhood and who receives means-tested public benefits. She wants a simple, low-cost way to set aside a modest sum he can use for his own disability-related expenses without jeopardising those benefits. Assume he satisfies the age-of-onset requirement and that contributions stay within the annual limit. Which vehicle BEST fits, and why?

1. A.A revocable living trust, because it avoids probate and can hold assets for his benefit indefinitely.Incorrect. A revocable trust funded with her assets does nothing for means testing during her life, and it offers none of the tax-free growth an ABLE account provides.
2. B.An ABLE account, because it grows tax-deferred, distributions for qualified disability expenses are tax-free, and balances up to a threshold are disregarded for Medicaid and SSI eligibility.Correct. The means-testing carve-out combined with tax-free qualified distributions is exactly what this modest-sum objective calls for.
3. C.A custodial UTMA account, because it is inexpensive to establish and the assets belong to the beneficiary.Incorrect, and actively harmful. UTMA assets count as the beneficiary resources for means testing, which is the precise outcome she is trying to avoid.
4. D.A Section 529 education savings account, because the tax treatment is identical and it may be used for any expense.Incorrect. A 529 is for qualified education expenses and carries no disability means-testing disregard; ABLE distributions cover a far broader set of disability expenses.

Why: An ABLE account is a tax-advantaged savings account for individuals whose qualifying disability began before the statutory age of onset. Contributions are made with after-tax dollars, the account grows tax-deferred, and distributions are entirely tax-free when used for qualified disability expenses, a deliberately broad category covering housing, transportation, education, assistive technology, health and basic living costs. Its defining feature is the means-testing carve-out: balances up to a specified threshold are disregarded in determining eligibility for Medicaid and for Supplemental Security Income, so the beneficiary can hold savings without losing benefits. Annual contributions are capped at the gift tax annual exclusion amount. The trade-off against a third-party special needs trust is simplicity and cost versus capacity: the ABLE account is inexpensive and the beneficiary can control it, but the annual cap and balance thresholds make it unsuitable for a large inheritance, which is what a special needs trust is designed to hold.

Ottoline Varga's adult son became blind before age 26 and receives means-tested Supplemental Security Income. She wants to set money aside for him without jeopardizing those benefits, and her representative raises a Section 529A ABLE account, which is a municipal fund security. Assume the annual contribution limit for the year is 19,000 dollars. Which statement is correct?

1. A.Contributions are deductible on her federal return, which is the account's principal advantage over ordinary savings.Wrong. Contributions are made with after-tax dollars; no federal deduction is available.
2. B.Contributions are after-tax, earnings grow tax-deferred and come out federally tax-free for qualified disability expenses, and account assets up to a stated threshold are disregarded for Supplemental Security Income eligibility.Correct. After-tax in, tax-free out for qualified disability expenses, and the benefits disregard is the account's defining feature.
3. C.An ABLE account is registered under the Securities Act of 1933 and must be sold with a statutory prospectus.Wrong. As a municipal fund security it is exempt from Securities Act registration and is offered by official statement or program disclosure document.
4. D.Distributions are federally tax-free regardless of how the beneficiary uses the money.Wrong. Non-qualified withdrawals are taxable on the earnings portion and generally carry a penalty.

Why: An ABLE account is the disability analogue of a 529 plan and is likewise a municipal fund security offered by states. Contributions are made with after-tax dollars and are not federally deductible, though some states allow a state deduction. Earnings accumulate tax-deferred and come out free of federal tax when used for qualified disability expenses, a deliberately broad category covering housing, transportation, education, assistive technology, health and basic living expenses. The feature that makes the account valuable here is that ABLE assets up to a stated threshold are disregarded in determining eligibility for Supplemental Security Income, which ordinary savings in the beneficiary's name would not be. Eligibility requires that the disability have begun before the statutory age threshold.