by Thomas D. Begley, Jr., CELA
New Jersey has now enacted the Achieving a Better Life Experience Act (“ABLE”). It is understood that by Fall this Act will be ready for implementation. The question will then remain: “What is the best option? Should the parent intending to set aside money for a child with disabilities establish an ABLE account or a Third Party Special Needs Trust?” Generally speaking, if the individual would be the beneficiary became disabled prior to attaining age 26, then an ABLE account might be considered, if the account will be small. There is very little point to establishing an ABLE account for a significant amount of money. There are two primary advantages to an ABLE account: (1) the income builds up tax free, and (2) the cost of establishing and administering the account is relatively small. The disadvantage is that on the death of the beneficiary any funds remaining in the account must go first to repay Medicaid for medical assistance paid during the beneficiary’s lifetime.
Therefore, it would seem that if the account is to be relatively small (i.e., $25,000), an ABLE account might make sense. However, once the account exceeds that amount it probably makes more sense to transfer the funds to a Pooled Trust Third-Party Subaccount. While there is a set-up fee and administrative costs, there are also benefits and there is no Medicaid payback. For accounts between $25,000 and $100,000, a Pooled Trust probably makes more sense. This is true even though the Pooled Trust does not enjoy the advantage of tax-free income. The truth of the matter is that on an account of $100,000, the income tax savings is minimal. The beneficiary is also usually in a low tax bracket.
Once the account exceeds $100,000, a Third-Party Special Needs Trust probably makes sense. Yes, there are costs of establishing and administering the trust, but there is no Medicaid payback on death. Once an ABLE account reaches $100,000, the beneficiary’s Supplemental Security Income (“SSI”) is suspended. If the funds are in the Third-Party Special Needs Trust, SSI remains in effect. Between the benefit of the SSI payment and the advantage of no Medicaid payback, the cost of establishing and administering the Third-Party Special Needs Trust probably makes the most sense.