People with disabilities and the parents of special needs children in Maryland have certain options for saving for their future care. The two biggest options include special needs trusts and ABLE accounts. While there are similarities between the two, they also differ in how they operate and pay out benefits.
Special needs trusts
Special needs trusts were created to allow a person who was disabled or chronically infirm to receive income without affecting their eligibility for government benefits like Medicaid, Social Security and Supplemental Security Income. This is accomplished through the creation of trust by a designated grantor. The assets are then distributed to the beneficiary or beneficiaries by the trustee.
Another choice for special needs savings is to create an ABLE account. ABLE accounts are tax-advantaged savings accounts designed to benefit individuals who develop disabilities before the age of 26. Contributions can be made by parents, relatives, friends or the beneficiary. However, the gift tax exemption determines a yearly cap on contributions over one year. The main point of setting up the account is that the investments can grow over the account’s lifetime without applying the income tax.
Special need trusts versus ABLE accounts
While both special need trusts and ABLE accounts are similar, they have different benefits and drawbacks that should be weighed during special needs planning. Benefits of special needs trusts include:
- government benefits can still be received by the beneficiary
- trust documents dictate how assets can be used
- assets will be protected from creditors
- an assigned trustee will make investment and distribution decisions
Benefits of ABLE accounts include:
- they can provide tax-exempt income
- they are low cost to set up
- accounts under $100,000 do not affect SSI eligibility
- they can be managed by the beneficiary if they are capable
Remember that you are not restricted to choosing between setting up a special needs trust or an ABLE account. You could conceivably set up both to benefit from the advantages of each. Seriously consider the needs of the beneficiary when making your decision.