Q: My son has physical disabilities and receives Medicaid. He is capable of handling his own affairs. If we create a special needs trust for him, he cannot be the trustee. Are there any other options?
A: In order to receive Medicaid, your son must have non-exempt assets of $2,000 or less. If he has assets in excess of $2,000, he can transfer the assets to a self-settled special needs trust (assuming he is younger than 65, which I will assume he is). If you want to provide funds for him, you can transfer the funds to a third-party special needs trust. You are correct that your son cannot be the trustee of either type of special needs trust.
If your son became disabled before the age of 26, an ABLE account is a (relatively) new option for him. The Achieving a Better Life Experience Act of 2014 created these accounts, and Illinois enacted its ABLE legislation in 2018.
Illinois' ABLE plan is administered by the State Treasurer's office, which has a website https://illinoisable.com. Your son can establish an Illinois account on the website, however, he is not required to use the Illinois plan. He can use the plan of another state if he prefers. ABLEnow is a national pan (https://www.ablenow.com). The earnings on all ABLE plans are tax free for federal tax purposes. The earnings on Illinois ABLE accounts are also tax free for Illinois purposes.
The Illinois plan offers various investment options in stocks and bonds based on the degree of risk with which your son is comfortable. The options range from conservative to aggressive, and, like other investment accounts are not insured by the FDIC or otherwise. If the account is kept in cash, it is insured by the FDIC up to $250,000.
Your son can create the account with his own assets and/or you or anyone else can contribute to the account. Annual contributions from all sources are limited to $15,000, and the total value of the account cannot exceed the cap on Section 529 college savings plans. In Illinois, the total balance of the IL ABLE account can grow to $450,000. At that point, contributions can no longer be made. However, the account may still grow based on earnings. (Note that SSI payments can be suspended if the account exceeds $100,000, however, the account owner should not lose Medicaid benefits.)
Similar to a special needs trust, ABLE account funds must be used for "qualified disability expenses." Qualified disability expenses can include housing, education, transportation, employment training, health care, financial and legal services, living expenses, and funeral expenses.
Similar to a 529 college savings plan or a health saving account, the plan administrator will report to the IRS how much your son withdraws from the account each year. If audited, you son will have to prove he used the funds for qualified disability expenses. Funds that are withdrawn and not used for qualified disability expenses are subject to income tax plus a 10% penalty and could disqualify your son from Medicaid or other benefits.
Of course there are many more details to an ABLE plan, but it may be the right plan for you son. Unlike a special needs trust, your son can control the account, and unlike a self-settled special needs trust, funds remaining in the account at your son's death do not need to be used to repay Medicaid for benefits he received.
For more information, you can also go to the Able National Resource Center website (www.ablenrc.org) and view a webinar entitled "Able Accounts and Special Needs Trusts."
This article is for informational and educational purposes only and does not constitute legal advice.