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Illinois ABLE Accounts and Special Needs Trusts

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
November 1, 2019

In this article we will explain Illinois ABLE Accounts and how they can be used in conjunction with Supplemental Needs Trusts in order to allow individuals with disabilities to earn incomes, receive inheritances and gifts, and accumulate assets without jeopardizing their government benefits.  

We explain Supplemental Needs Trusts and special needs planning.  We answer the question, “what are ABLE Accounts and how do they work?”.  Finally we compare ABLE Accounts to Supplemental Needs Trusts for various goals in special needs planning.   

Supplemental Needs Trusts and Special Needs Planning

Before we dive into Able Accounts, let’s discuss Supplemental Needs Trusts and how they are used for special needs planning.  If an individual has a disability he or she may be eligible to participate in several government benefit programs, including Supplemental Security Income (“SSI”).  Many of these programs are means tested, meaning that if the individual with a disability earns income or accumulates assets over a certain thresholds, his or her benefits will be reduced.  

One of the primary purposes of special needs planning is to provide a vehicle for individuals with disabilities to earn income and accumulate assets while still retaining their government benefits.  Prior to the advent of ABLE accounts, Supplemental Needs Trusts were the primary tool used to accomplish this.  

Assets owned by a Supplemental Needs Trust and income that is properly transferred to the trust generally do not count against the beneficiary of the trust when conducting a means test for government benefits.  

However, there are a few downsides to transferring assets to a Supplemental Needs Trust:

  1. Assets in a Supplemental Needs trust cannot be used on groceries or rent without reducing government benefits.  This is because food and living costs are the stated purpose of these benefits.  Assets owned by Supplemental Needs Trusts are intended to be used for purposes for which government benefits do not provide, including vacations, entertainment, luxury items, etc.  
  2. In order for the trust to function properly, someone other than the individual with a disability generally must be the trustee of the trust.

Illinois ABLE Accounts can be used in conjunction with Supplemental Needs Trusts to fill some of these gaps.

For more on this, check out our article: Special Needs Trusts Explained.

What Are ABLE Accounts and How Do They Work?

The federal Achieving a Better Life Experience (“ABLE”) Act allowed for states to adopt related legislation to allow for the creation of taxed-advantaged accounts known as ABLE accounts that, like Supplemental Needs Trusts, allow individuals with disabilities to save money without reducing their government benefits.

If Illinois able account funds are used for “Qualified Disability Expenses,” the funds receive tax advantaged treatment and do not negatively impact means-tested government benefits.  Qualified Disability Expenses include a wide range of expenses related to the account owner’s disability, including education, housing, transportation, employment training and support, assistive technology, and personal support services.

ABLE Account contributions are made with post-tax dollars.  Income earned from the funds in the account is not taxed and distributions for Qualified Disability Expenses are not taxed.

The maximum annual contribution to an Illinois ABLE Account is the same as the federal annual gift tax exemption. In 2019, the maximum annual contribution is $15,000.00.  The maximum account balance for an Illinois ABLE Account is $350,000.00.  However to the extent an account exceeds $100,000.00, the account balance will negatively impact means testing for SSI.  

When an ABLE Account owner passes away, any funds remaining in the account are applied in the following order:

  1. Payment of outstanding bills for Qualified Disability Expenses, including funeral expenses;
  2. Payment to Medicaid to pay back Medicaid for any benefits received by the ABLE Account owner; and
  3. Distribution to the owner’s legal heirs and beneficiaries.

In order to qualify for an ABLE Account an individual must have been disabled prior to age 26.  

For more on this check out our article: Illinois ABLE Accounts Explained.

Illinois ABLE Accounts Versus Supplemental Needs Trusts  

Whether an ABLE Account or a Supplemental Needs Trust or both in conjunction is the best strategy for an individual’s special needs planning depends on that individual’s asset structure, expectations of inheritance and income, typical expenses, and personal goals.  

Below are some factors to consider:

  • ABLE Account funds and Supplemental Needs Trust funds are intended to be used for different purposes.  While ABLE Account funds are to be used for Qualified Disability Expenses, which includes groceries and housing, Supplemental Needs Trust funds are intended to be used for purposes other than groceries or housing.  For many individuals it makes sense to maintain both an ABLE Account and a Supplemental Needs Trust, and to use each for different types of expenses.
  • ABLE Accounts have an annual contribution limit and a cap on the amount of funds that they can hold without reducing SSI benefits.  For individuals with greater income and assets than these limits, a Supplemental Needs Trust may be used instead of or in addition to an ABLE Account.  
  • ABLE Account assets can grow tax free, while Supplemental Needs Trust assets are generally subject to income tax.  
  • ABLE Accounts require that the owner become disabled prior to age 26.  For individuals who become disabled later in life and who are therefore not eligible for ABLE Accounts, Supplemental Needs Trusts trusts provide an alternative option.  
  • Supplemental Needs Trusts require a third party trustee to manage distributions, while ABLE Accounts allow the owner to have direct control over the assets in the account.  

As an attorney advising in the area of special needs, it is important to not only draft documents, but to work with the client to develop a strategy to for funding accounts and to counsel the client on how each account should be used in the client’s daily life.

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