Securing an Injured Child’s Financial Future

Posted on October 24, 2021

When your child is injured, so many new stressors are added to your life. Worrying about their financial future and eligibility for means-tested government benefits should not be one of those concerns. To help you secure your injured child’s financial future and maintain eligibility for benefits like Medicaid and Supplemental Security Income (SSI), utilizing a special needs trust or ABLE account might be the right choice for you if your child is receiving a settlement.

Special needs trust

A special needs trust, also sometimes called a supplemental needs trust, is established to improve the quality of an individual’s life without disqualifying them from eligibility to receive public benefits. Money from one’s settlement can be placed into this kind of trust to make purchases in the best interest of the beneficiary. Oftentimes, settlement proceeds do not have the longevity to cover the ongoing costs associated with your child’s medical care, so maintaining eligibility for means-tested government benefits is important. When saying “means-tested government benefits” we mean those that have income and asset limits associated with beneficiary eligibility. For more information regarding these types of benefits, read our post about them here.

The special needs trust is managed by a trustee who is appointed during the creation of the trust. Your child is designated as the beneficiary. The trust can be used to pay for “noncountable resources” or other items that government benefits don’t cover. Even though the Trust principal is not considered a resource, disbursements from the trust may be considered income to the beneficiary, depending on the nature of the disbursement. For example, funds can be paid from the trust to someone other than the beneficiary (for medical care or social services) and this would not be considered “income” for means-tested benefits purposes. Additionally, distributions made for basic shelter related expenses, food, or cash for any purposes would reduce SSI benefits. Trustees are specifically trained with regard to income-based benefits and how they correlate with one’s trust.

What is an ABLE account?

The Achieving a Better Life Experience Act (ABLE Act), passed in 2014, made tax-free savings accounts available to those with disabilities. To be eligible for an ABLE account, the beneficiary (your child) must be one of the following:

  • Eligible for SSI based on disability or blindness that began before age 26;
  • Entitled to disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow’s/widower’s benefits (DWB) based on disability or blindness before age 26; or
  • Someone who has certified, or whose parent or guardian has certified that he or she met the criteria for a disability certification before age 26.

Unlike a special needs trust, the mere presence of funds within an ABLE account can affect eligibility for needs-based public benefits if monies exceed $100,000. The first $100,000 in the account is not deemed an asset by the IRS. However, any amount exceeding the $100,000 threshold and certain income-based programs could suspend payment. Fortunately, ABLE account earnings and the money distributed for qualified medical expenses are not viewed as taxable income.

ABLE account funds can be used to pay for qualified disability expenses (QDE) like education, housing, assistive technology, health, and basic living expenses like food. The goal of an ABLE account is to reduce the financial burden of those with disabilities. Each eligible individual may only have one ABLE account, but anyone can contribute to it up to the annual gift tax exemption amount ($15,000 as of 2021). If the beneficiary has a job and they and their employer is not contributing to a retirement plan, additional funds may be deposited into the ABLE account up to the Federal Poverty Level ($12,880 as of 2021).

Each state handles ABLE accounts differently, but you are not limited to creating the ABLE account in the state where you live. To discuss whether an ABLE account or special needs trust is right for your child, call us at 716-888-1833 to talk with one of our experts.