529 ABLE plans, also known as 529A plans, are state-sponsored accounts authorized by Congress that allow people with disabilities to save up to $100,000 and still qualify for benefits such as Medicaid and Supplemental Security Income (SSI). Additionally, these plans, similarly to 529 college plans, offer tax-free growth.
Special needs trusts, on the other hand, are trusts that are set up specifically to supplement the benefits that a person with special needs receives from the government. A trust is a binding relationship between three parties: a donor, who funds the trust, a trustee who holds and disperses the funds at the instructions of the donor, and the beneficiary who receives the benefits of the fund. For a special needs trust, the donor is typically a parent or relative, and the beneficiary is the person with the special needs.
Benefits and Drawbacks of a 529A Plan
To qualify for a 529A plan, a person must be either blind or disabled prior to his 26th birthday, and he must be either eligible for SSI or have a doctor's recommendation that the disability results in severe limitations. If a person qualifies, the biggest benefit is that, like a 529 college plan, any contribution can grow tax-free.
Anyone can make contributions to a 529A plan: friends, relatives or the disabled person himself. Disbursements from the plan can be used to pay for qualified expenses such as education, housing, transportation, legal fees or other types of qualified expenses. If the funds are used for non-qualified expenses, those payments are subject to normal income tax plus a 10% penalty, similar to early disbursements of a 401(k) for non-qualified expenses.
However, unlike 529 college plans, 529A plans have a contribution limit currently capped at $14,000 a year. When a person makes a contribution to a 529A plan, it is considered an irrevocable gift, whereas contributions made to a 529 college plan can be taken back at a penalty.
Benefits and Drawbacks of a Special Needs Trust
Special needs trusts can be either first-party trusts, third-party trusts or pooled trusts. This type of trust allows a disabled person and his family to contribute an unlimited amount to the trust without affecting his eligibility for government benefits. Conversely, once the $100,000 limit of a 529A plan is hit, the disabled person loses access to Medicaid and SSI.
Special needs trusts, depending on how they're structured, also allow for any asset to be held in trust. These assets include stocks, bonds, property or alternative investments. However, special needs trusts are subject to taxes and cost between $2,000 and $5,000 to set up.
Given the benefits and drawbacks of each, 529A plans will not completely replace special needs trust but will provide disabled people and their families with additional savings options. If a disabled person wishes to save money for school or a similar expense and expects to have less than $100,000 contributed, a 529A plan is a good option for avoiding taxes.
If a disabled person expects to have greater than $100,000 held in trust or has access to multiple asset types, a special needs trust is a good option. Donors can contribute large amounts of assets to a special needs trust without causing the beneficiary to lose Medicaid and SSI eligibility.