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June 29, 2024

Using CalABLE as a Distribution Tool for Special Needs Trusts

CalABLE and Special Needs Trusts

CalABLE accounts are intended for individuals with disabilities who receive means-tested public benefits to be able to save funds above the $2000 threshold allowed by Supplemental Security Income or SSI.

Background

In December 2014, Congress passed the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act, which added Section 529A to the federal tax code. It is important to note this is not part of the Social Security POMS (Procedure Operating Manual) and that it is associated with the IRS tax code. The idea behind the Act was to give individuals with disabilities more latitude to save money for bigger purchases. The $2000 SSI resource limit was established in 1974 and partially adjusted for inflation in 1989 but has remained the same for all these years despite increases in daily costs for all individuals but especially those living with disabilities.

The resource limit can be problematic for individuals who wish to save money. For example, suppose that John Doe wishes to save for a downpayment on a vehicle and John is using his work earnings toward this goal. Unfortunately, if John saves more than $2000 and the balance in his account at the end of the month exceeds this resource limit, John is ineligible for SSI going forward. Clearly, this could not be the intent of Social Security to negatively impact the ability to save, yet prior to 2014 this was indeed the impact of this resource limit.

The result of the ABLE Act was to provide a separate method where the disability community can open an ABLE account in any state where available and begin taking advantage of the program. Please note: To qualify, the disability must have been present prior to age 26 and the funds must be used for qualifying expenses. https://calable.ca.gov/?utm_source=excitant&utm_medium=cpc&utm_campaign=transition

CalABLE as a Distribution Tool Especially for Special Needs Trusts

While ABLE accounts are a great way to save more than the $2000 SSI threshold, they also have several other advantages as a way to distribute funds to the account owner. In the following examples, we make the assumption that the account holders are SSI recipients and they also have special needs trusts, most likely through a third-party inherited special needs trust.

CASH: Distribution of cash in any amount to a special needs beneficiary who receives SSI will always result in a dollar-for-dollar loss. In other words, this simply should not be done. For the most part, there are plenty of tools to allow direct distribution or direct purchase. One of the best tools is a prepaid Visa card from Truelink Financial. https://www.truelinkfinancial.com/prepaid-card?utm_source=google&utm_medium=cpc&utm_campaign=brand&utm_term=true%20link%20financial_p&gad_source=1&gclid=Cj0KCQjwj9-zBhDyARIsAERjds20_2m_JD7dRWNJ9bAuGJeYIm_IfP-v-ZLIp5tp03hF9PaWNsNVvq4aAqElEALw_wcB Social Security SSI POMS has published guidelines on how to use this prepaid Visa card without jeopardizing any loss of SSI. https://www.truelinkfinancial.com/compliance-guide/2021. However, there are occasions when someone simply needs cash. Let’s say John Doe lives in an older apartment complex and his laundry facility still requires coins and dollar bills. The apartment has not yet implemented prepaid cards. John’s special needs trust distributes to his CalABLE account and Mark is able to withdraw funds for this purpose.
PRIVACY: While Truelink is an excellent tool, the cardholder must keep and turn in all receipts to the trustee of the special needs trust. This is because Social Security may decide to audit the account, and the account holder, with the trustee’s assistance, will have to evidence that all transactions have been handled properly, not resulting in any unreported in-kind support and maintenance. This can be cumbersome and to some extent be considered an invasion of privacy. Let’s contrast this with CalABLE, which does not require receipts. The trustee can simply deposit funds up to the allowable amount (currently $18,000 annually), and the money becomes the account owner’s funds. Of course, the expenditures must meet the definition of ABLE qualified expenses, but short of gifts for others or illegal purchases, almost everything else is acceptable.
ISM AVOIDANCE: Housing in California is simply expensive. As a result, it is fairly common for a special needs trust to either pay all or part of the beneficiary’s shelter costs, resulting in an In-Kind Support and Maintenance calculation for beneficiaries who receive SSI. Payment of any shelter cost including rent, mortgage, utilities, and property taxes triggers In-Kind Support and Maintenance which currently tops out at $334 monthly. While Social Security may eliminate the shelter rule, it is currently in place. One way around this is to distribute up to $18,000 annually into the ABLE account and have the account holder pay the shelter costs directly from the ABLE account. A special needs trust can make the distribution to an ABLE account as can other individuals.

Considerations

The account holder has complete discretion over the ABLE account unless there is an authorized representative. See https://calable.ca.gov/faqs/who-can-open-a-calable-account-for-an-eligible-beneficiary for a list of those who qualify. Because the ABLE account belongs to the account holders, they have control over how the distributions are made. If the account holder struggles with impulse control, this could be an issue. For example, let’s say the special needs trustee distributes $1500 for shelter costs and then places it into the ABLE account. The beneficiary could decide not to use the funds in this manner and other than restricting the funds going forward, there is no immediate consequence. The trustee and beneficiary/account holder are left with an unpaid shelter bill as well as using up the funds toward the maximum $18,000 annual limit. Therefore, from a practical perspective, a trustee must always consider the nature of the account holder and consider crutches to help ensure that the correct payment is made. For example, if rent is due on the first of the month, one would not distribute the funds from the special needs trust until about ten days prior to the due date. Consider distributing on a monthly basis even though distributions can be made quarterly or annually. In other words, it is important to know your beneficiary/account holder and take this into consideration.

Combination of Distributions

As a trustee, you will probably find that a combination of direct payment, TrueLink Financial, and ABLE account provides the most optimum solution for the SNT beneficiary. The goal is to:

Make sure bills are paid timely
Ensure independence is fostered as much as possible
ISM is avoided if possible
Privacy is respected whenever possible

At Hitchman Fiduciaries, we develop an annual spending plan with the beneficiary and take all these tools into account. However, it is not just about what “saves” the most money e.g. ISM avoidance, but also what is “safe” for the beneficiary. For example, while the SNT beneficiary might be able to pay a private health insurance premium, it is probably better to have that on automatic payment from the special needs trust. It is simply too serious if payments are missed, and the trustee will not be able to follow up with the insurer without the beneficiary on the phone at the same time due to HIPAA regulations. We next consider eligibility for purposes of an ABLE account (currently disability must have developed prior to age 26 years old) and if eligible, we suggest that the beneficiary open one. However, if there is concern about the ability to manage the ABLE account, we choose to err on the side of caution. As in the above example, if the rent money is spent in some other way, the trust can only contribute up to $18,000 annually to an ABLE account, and this may be an issue.

Conclusion

The ABLE Act not only provides a means to save for SSI recipients but it also creates a myriad of different distribution opportunities from a special needs trust. A good trustee will look at all of them and strongly consider a combination of methodologies based on what is appropriate.