|Special Needs Trusts (SNTs) have their advantages and disadvantages to consider in the estate planning process. The recent CMS directive regarding ABLE contributions highlights how the two planning vehicles can work together for the benefit of the individual with disabilities and their families.|
Before going into the details of the CMS directive, let’s first review the strengths and limitations of each type of estate planning tool. Both are tax-advantaged accounts that shelter assets from being considered a countable resource for Medicaid and the SSI Social Security benefit program. After the death of the individual with disabilities, the assets of an ABLE account and a first party SNT are used to pay back the State for Medicaid expenses used by the individual. For a third party SNT, assets remain with the trust. Withdrawals from SNTs can reduce SSI payments if they are for the routine room and board expenses of the individual. ABLE accounts allow for withdrawals for such expenses with no penalty. Below is a brief comparison table of the two planning vehicles:
|The CMS Letter to State Medicaid directors directly addresses whether SNTs can make contributions to ABLE accounts. The letter states that “distributions from such a trust made on behalf of the trust beneficiary to the beneficiary’s ABLE account should be treated the same as contributions to ABLE accounts from any other third party.” In other words, such distributions will not count as either income or resources for Medicaid and SSI eligibility determination purposes.|
Implications of Allowing SNT contributions to ABLE accounts
One of the main drawbacks of an SNT is the penalty individuals face for withdrawals made for room and board. This penalty can amount up to 1/3rd of the individual’s SSI payment. At the current maximum of $735 dollars, that reduction translates to $245 a month! Since ABLE accounts don’t have such a penalty, a simple strategy for SNT withdrawals is for the trust to contribute to the ABLE account first and then have the ABLE account make the regular room and board type payment on behalf of the individual. Such a strategy shows the complimentary nature of the two accounts: SNTs have more rigid withdrawal guidelines but retain assets at the death of the individual, while ABLE accounts have more flexible withdrawal rules, but the assets most likely will go to Medicaid at the end of the individual’s life.
The current CMS guidance gives trustees and family members a great deal of flexibility in managing withdrawals for individuals with disabilities. The guardian or trustee needs to be mindful of the rules governing both but should be managing withdrawals in such a way as to maximize benefits for the individual with disabilities as well as the remainder beneficiaries while minimizing costs (such as taxes) to both accounts.
* In Ohio, ABLE accounts are referred to as STABLE accounts.