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When planning for your long-term financial support or that of a loved one with a disability, you’ll likely come across two major options: a special needs trust vs ABLE account. Both serve to protect eligibility for government benefits such as SSI and Medicaid while allowing savings for essential and non-essential needs. However, they are structured very differently and serve distinct purposes.
A special needs trust is a legal arrangement that holds and manages assets for a person with a disability without affecting their means-tested government benefits. An ABLE account is a tax-advantaged savings account available to people with disabilities that also shelters assets from benefit limits, but under strict guidelines.
Understanding what each option covers, and where it falls short, is the first step toward making a well-informed financial choice that aligns with your goals and legal requirements.
- How Each Option Works Under Texas Law
- When a Special Needs Trust Might Be the Better Fit
- Where an ABLE Account Offers an Advantage
- Can You Use Both a Special Needs Trust and an ABLE Account?
- What to Consider Before Making a Choice
- Common Situations and How Each Option Might Apply
- One More Consideration: Tax Treatment and Growth
- Smart Planning Starts with Knowing the Limits
How Each Option Works Under Texas Law
Special Needs Trusts in Texas
Texas recognises two main types of special needs trusts: first-party and third-party trusts.
- A first-party special needs trust is funded with the beneficiary’s own assets, usually from a personal injury settlement or inheritance. Under federal law and the Texas Medicaid Estate Recovery Program, these trusts are subject to payback provisions once the beneficiary passes away.
- A third-party special needs trust is created by someone else, such as a parent or grandparent, and is not subject to payback. This type is often used for estate planning.
Both trust types must meet federal requirements under 42 U.S.C. § 1396p(d)(4) and be created for someone under the age of 65. The trustee is responsible for managing the funds and using them in ways that do not interfere with the beneficiary’s benefits.
ABLE Accounts in Texas
The Texas ABLE Program is administered through the state-compliant savings plan, which allows eligible individuals to deposit and manage money in a tax-free account.
To open an ABLE account, the individual must have developed the qualifying disability before turning 26. Although federal law now allows ABLE accounts for those disabled before age 46, Texas has not yet updated its eligibility threshold, so the age 26 limit remains.
Funds in a Texas ABLE account can grow tax-free and are not counted against the $2,000 asset limit for SSI or Medicaid, provided the balance remains under $100,000. However, Medicaid payback rules still apply after the beneficiary’s death.
When a Special Needs Trust Might Be the Better Fit
Choosing a special needs trust vs ABLE account often comes down to control, contribution limits, and flexibility. A special needs trust might be more suitable for your situation if:
- The beneficiary is over the age of 26 and thus not eligible for an ABLE account under Texas rules.
- You plan to contribute more than the ABLE annual contribution limit, which is capped at the federal gift tax exclusion amount (currently around $17,000 per year).
- You want to structure a long-term estate plan that includes multiple contributors such as grandparents, siblings, or legal guardians.
- The individual will likely receive a substantial settlement or inheritance.
Unlike ABLE accounts, special needs trusts can hold unlimited funds, and third-party trusts do not face Medicaid payback. They also allow you to appoint a trustee who can manage the account and make purchases that comply with benefit eligibility rules, such as for therapy, education, housing, and recreation.
Where an ABLE Account Offers an Advantage
Although more limited in scope, an ABLE account offers certain conveniences you might prefer, especially for day-to-day expenses and personal autonomy. It may be the better option for you if:
- You or your loved one became disabled before age 26 and want a tax-friendly way to save and spend.
- You need quicker access to cash for qualified disability expenses without the formality of going through a trustee.
- You prefer a savings plan with lower setup and administrative costs.
- You want to give the account holder more independence in spending decisions.
Texas ABLE accounts can be accessed via debit card, which makes them practical for covering short-term or regular costs like medical expenses, transportation, housing, and assistive technology. Unlike a trust, you don’t need to ask a third party to release funds for basic daily needs.
Can You Use Both a Special Needs Trust and an ABLE Account?
Yes, and this is often the most balanced approach. When evaluating a special needs trust vs ABLE account, you don’t necessarily have to choose one over the other. In fact, combining both can offer you the strengths of each:
- Use a trust to hold larger sums or complex assets like property or investments.
- Use the ABLE account to receive periodic distributions from the trust for everyday spending needs.
Doing so can give your loved one both structured long-term planning and more freedom to handle daily financial tasks. You’ll need to ensure that the disbursements from the trust to the ABLE account follow all benefit eligibility guidelines, and the ABLE account itself is used for qualified expenses.
What to Consider Before Making a Choice
When deciding between a special needs trust vs ABLE account, think about the following:
- Age Eligibility: ABLE accounts in Texas still require onset of disability before age 26.
- Annual Contribution Limits: ABLE accounts have caps; trusts do not.
- Setup and Maintenance: Trusts typically require legal assistance to establish and may have ongoing administrative duties. ABLE accounts are easier to set up online.
- Medicaid Payback Rules: First-party trusts and ABLE accounts are subject to payback after death. Third-party trusts are not.
- Control: A trustee oversees a special needs trust. An ABLE account can be managed directly by the beneficiary or their authorised legal representative.
- Benefit Protection: Both options protect SSI and Medicaid eligibility, provided they’re structured correctly.
If you’re creating a financial plan for someone with a disability, your choice may ultimately depend on the size of the assets, age of the person, and how you intend the funds to be used—immediate daily needs versus long-term security.
Common Situations and How Each Option Might Apply
Here are a few example scenarios to help clarify your decision:
- You receive a legal settlement after an accident that caused a disability at age 30.
You’re ineligible for a Texas ABLE account. A first-party special needs trust is your best route to protect benefits and use the funds legally. - You’re a parent with a child diagnosed with autism before age 5.
You might open an ABLE account for regular therapy and tech expenses, and establish a third-party trust to hold life insurance proceeds for future support. - You’re planning your estate and want to leave money for your adult nephew who receives SSI.
A third-party special needs trust avoids disqualifying him from benefits and skips Medicaid payback later. - You’re an adult with a stable job and low savings, but you want a flexible way to plan.
If you meet the disability age threshold, an ABLE account gives you more independence and tax-free growth.
One More Consideration: Tax Treatment and Growth
When weighing the special needs trust vs ABLE account decision, tax implications also come into play.
- ABLE accounts grow tax-free. Earnings are not taxed if used for qualified expenses.
- Special needs trusts are typically taxed at higher rates, and income retained in the trust may be subject to compressed tax brackets. That said, certain tax-efficient planning strategies can help reduce exposure if you’re working with a professional.
ABLE accounts clearly offer more favourable tax treatment for modest, long-term savings. But if you’re dealing with large gifts or inheritances, the special needs trust allows for more complex planning, despite the potential tax drag.
Smart Planning Starts with Knowing the Limits
Neither a special needs trust nor an ABLE account is one-size-fits-all. What works best depends on your age, asset sources, financial goals, and benefit eligibility. Some families rely on one; others use both.
If you’re planning for the future of someone with a disability—or your own—you’ll want to choose the structure that protects essential benefits while supporting autonomy and access to resources.
Conclusion
Choosing between a special needs trust and an ABLE account is more than a financial decision. It affects your independence, access to care, and long-term peace of mind. By understanding the rules, benefits, and limitations of each option under Texas law, you’re better positioned to plan in a way that protects what matters most—your stability, autonomy, and future support.
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Frequently Asked Questions
Yes. Many families use both to get the flexibility of an ABLE account and the broader protections of a trust.
Any remaining funds may be subject to Medicaid payback for services provided after the account was established.
No. Texas has not yet adopted the federal change increasing the age to 46, so the age of onset must still be before 26.
A trustee is appointed to manage the funds, and must ensure that distributions comply with benefit eligibility rules.
Yes. Trusts typically require drafting by a lawyer and may involve ongoing administrative costs, unlike ABLE accounts, which are lower cost to manage.
