First-Party vs. Third-Party Special Needs Trusts and ABLE Accounts in Virginia: 2025 Guide and 2026 Preview
Executive summary
Virginia families usually need three tools to preserve benefits while funding quality of life: the first-party special needs trust, the third-party special needs trust, and the ABLE account. Use third-party SNTs for family gifts and inheritances, first-party SNTs when the beneficiary already owns the assets, and ABLE for day-to-day spending, housing, and modest savings. In Virginia, ABLEnow and ABLEAmerica have two major advantages: a state income-tax deduction for contributors and a statutory bar on Medicaid estate recovery unless federal law requires it. On January 1, 2026, ABLE eligibility expands to people whose disability began before age 46, which will materially broaden who can use an ABLE account.
Quick comparison
Feature | First-party SNT | Third-party SNT | ABLE account (VA: ABLEnow/ABLEAmerica) |
|---|---|---|---|
Whose money funds it | Beneficiary’s | Anyone else’s | Technically beneficiary’s (account in their name) |
Age limits | Must be established before 65 | None | Disability must begin before age 26 (expands to 46 on Jan 1, 2026) |
Medicaid payback at death | Required | None | Federally allowed, but Virginia law bars state recovery unless federally required |
Annual contribution cap | None | None | $19,000 in 2025, plus “ABLE to Work” amount if eligible |
SSI interaction | Trust resources excluded if drafted correctly; distributions for food/housing can reduce SSI | Same | Up to $100,000 ignored for SSI; housing and food paid from ABLE do not trigger SSI ISM if handled correctly |
Typical uses | Shield a windfall the beneficiary already received | Inheritances and lifetime gifts tied to an estate plan | Monthly and routine expenses, accessible savings, housing and groceries, small windfalls |
First-party SNTs in Virginia (self-settled; “d(4)(A)”)
When to use. Use when a person with a disability already owns assets that would jeopardize needs-tested benefits, such as an inheritance paid outright or a personal injury settlement.
Core rules. The beneficiary must be disabled. The trust must be established and funded before age 65 by the beneficiary, a parent, grandparent, guardian, or a court. It must contain a Medicaid payback clause that reimburses every state that provided Medicaid when the trust ends.
Administration points. The trustee should purchase goods and services for the beneficiary’s benefit. Paying for food or shelter for an SSI recipient usually reduces SSI (ISM). Use ABLE in tandem to address housing without the SSI penalty, as explained below. See “Using tools together.”
Third-party SNTs in Virginia (family-funded)
When to use. Use for lifetime gifts and inheritances from parents, grandparents, or others. This is the default receptacle for significant family resources.
Core rules. Only third-party assets may fund the trust; do not commingle the beneficiary’s own funds. There is no Medicaid payback requirement at death, so remainder beneficiaries can be named freely. Draft to supplement, not replace, public benefits, and avoid direct cash distributions that could affect SSI.
Estate-plan integration. Coordinate wills, revocable trusts, retirement and life-insurance beneficiary designations so intended gifts flow to the SNT, not to the beneficiary outright.
ABLE accounts in Virginia (ABLEnow/ABLEAmerica)
What ABLE does. An ABLE account lets an eligible person save and spend in their own name while preserving benefits, with tax-free growth for qualified disability expenses. In SSI cases, up to $100,000 in the ABLE account is disregarded for resources. ABLE distributions are not counted as income; if a housing distribution is retained into the next month, it can become a countable resource, so timing matters.
Eligibility. As of today, the disability must have begun before age 26. On January 1, 2026, eligibility expands to disabilities beginning before age 46. This is a material change worth flagging for clients who are currently ineligible solely due to onset age.
Contribution limits. The standard annual cap equals the federal gift-tax annual exclusion, $19,000 for 2025. If the beneficiary is employed and no contributions are made for them to a 401(a), 403(b), or 457(b) plan that year, they may also contribute up to the lesser of their compensation or the prior-year federal poverty guideline for a one-person household. For 2025, that additional “ABLE to Work” cap is $15,060.
State-specific advantages in Virginia.
- No Medicaid estate recovery against ABLEnow/ABLEAmerica accounts of Virginia residents unless required by federal law. This protection is codified.
- State tax deduction. Virginia allows an individual state income-tax deduction up to $2,000 per contributor per account per year, with carryforward; contributors age 70+ can deduct the full amount contributed.
- Plan cap. ABLEnow’s cumulative account limit is $550,000; SSI considerations still apply at $100,000.
Qualified Disability Expenses (QDEs). QDEs include basic living expenses such as housing and food. Using ABLE to pay rent, utilities, or groceries is permitted and, if spent in the same month, avoids an SSI ISM reduction that a trust or a parent paying those costs directly would trigger. Maintain receipts and monthly timing discipline.
Program administration note. ABLEnow and ABLEAmerica are administered by Virginia529 under the Commonwealth Savers Plan in Title 23.1, Chapter 7; Virginia did not “rebrand” as Commonwealth Savers, that is the plan name in the Code.
Using tools together
Housing and groceries. For SSI recipients, route funds through ABLE for rent and food to avoid the ISM reduction. A trustee can distribute up to the annual ABLE cap from a third-party SNT into the beneficiary’s ABLE account, then the beneficiary pays housing from ABLE within the same month.
Large vs. small dollars. Use a third-party SNT for real property, vehicles, investment accounts, and life-insurance proceeds. Use ABLE for routine spending, occasional electronics, small travel, and co-pays. Use a first-party SNT to shelter a beneficiary-owned windfall; expect eventual payback.
Approaching age 65. If a beneficiary is nearing 65 and needs a self-settled trust, timing is critical. After 65, the standard first-party SNT cannot be newly established; a pooled d(4)(C) trust can be used instead, although transfers after 65 can trigger Medicaid transfer penalties for long-term care eligibility.
Practical drafting and administration pointers
- Authority to fund ABLE. In third-party SNTs, expressly authorize the trustee to contribute to the beneficiary’s ABLE account up to the annual limits and to coordinate monthly housing payments through ABLE.
- No commingling. Prohibit beneficiary-owned assets from entering a third-party SNT. If a mistake occurs, segregate and repair immediately.
- Distributions language. Emphasize supplement-not-supplant intent. Allow broad discretion while warning fiduciaries about SSI/ISM rules and monthly timing if ABLE is not used.
- Fiduciary choice. Consider a professional co-trustee experienced in SNT administration plus a family co-trustee who understands the beneficiary’s needs.
- Recordkeeping. For ABLE, keep receipts and align withdrawals with the month of expense, especially for housing.
- Tax awareness. ABLE growth and QDE withdrawals are tax-free. Third-party SNTs may be grantor trusts during the parents’ lives; after death, consider whether a Qualified Disability Trust election under IRC § 642(b)(2)(C) is available. Coordinate with the family’s tax professional.
When each tool is the lead option
- Lead with a third-party SNT when designing an estate plan for parents or grandparents to pass assets to a disabled child/grandchild. Fund it now or at death. Invite relatives to name it on beneficiary designations.
- Lead with a first-party SNT when a beneficiary receives or will receive assets in their name that exceed resource limits.
- Lead with ABLE for routine spending and modest savings, particularly to cover housing and groceries for an SSI recipient and to give capable beneficiaries personal control over day-to-day finances.
Key 2025 figures at a glance
- ABLE contribution limit: $19,000.
- ABLE to Work add-on (if eligible): up to $15,060 for 2025.
- SSI threshold for ABLE balances: first $100,000 disregarded.
- Virginia ABLE tax deduction: up to $2,000 per contributor per account per year, carryforward; full deduction at age 70+.
- Virginia ABLE Medicaid recovery: barred unless federally required.
- ABLE age-of-onset expansion: begins January 1, 2026, to age-46 onset.
FAQs
Does paying rent from an ABLE account reduce SSI?
No, if you pay from ABLE and the withdrawal is used in the same month, SSI is not reduced for ISM. Retaining the withdrawal into the following month can make it a countable resource, so align timing.
Can we keep both an SNT and an ABLE account?
Yes. Many Virginia families use all three tools: a third-party SNT for inheritances, a first-party SNT as a backstop if the beneficiary receives assets, and ABLE for day-to-day spending and housing.
What happens to Virginia ABLE funds at death?
Virginia law bars the Commonwealth and its agencies from seeking Medicaid recovery from ABLEnow/ABLEAmerica accounts of Virginia residents unless federal law requires it. Confirm any out-of-state Medicaid usage, because other states can still file claims for services they provided.
What if the beneficiary is 30 with accident-onset disability?
As of 2025, they cannot open ABLE because onset occurred after age 26; consider an SNT. Starting January 1, 2026, if onset was before 46, they may become eligible to open ABLE.
Can an employed beneficiary exceed the $19,000 cap?
Possibly. If no 401(a), 403(b), or 457(b) contributions are made for that year, they can add the lesser of wages or the prior-year one-person FPL ($15,060 for 2025).
If you are planning for a loved one with a disability in Waynesboro, Staunton, Augusta County, or anywhere in the Shenandoah Valley, we can design a coordinated plan that uses the right tool in the right order and avoids benefit pitfalls. Schedule a free 30-minute consultation today.
