How to Avoid Losing Government Benefits when Receiving a Personal Injury Settlement
Government benefits provide much-needed assistance to low-income and/or disabled individuals and their families. Unfortunately, eligibility for certain government benefits (e.g. Medicaid and/or SSI, but not Medicare or SSDI) may be jeopardized when the individual receiving such benefits is involved in an accident and is set to be awarded a sizeable personal injury settlement.
Fortunately, tools exist to protect an individual’s eligibility for government benefits when they are set to receive a personal injury settlement that would increase their available resources above the resource limit ($2,000 for a single person; $3,000 for a married couple). For example, an Achieving a Better Life Experience (ABLE) account or a Special Needs Trust (SNT) may help shield personal injury settlements from being considered a countable resource for Medicaid and SSI purposes. However, sometimes an ABLE account or an SNT does not fit an individual’s situation; if that is the case, then there is another option to be considered — the “Spend Down” Method.
An ABLE account is a tax-advantaged savings account for the benefit of a disabled individual, with the onset of a disability prior to age 26.
The contributions to the account can be made by family members, friends, even the disabled individual, and/or a Special Needs Trust. Currently, the total annual contribution to an individual’s ABLE account is $15,000. An individual with an ABLE account that is also employed, who does not participate in an employer-sponsored retirement account, may make an additional contribution up to the lesser of: (1) the disabled individual’s total earned income for the year, or (2) the poverty line (currently $12,490 for Minnesota).
An individual with an ABLE account who also receives SSI faces further limitations to the balance of their ABLE account compared to an individual that has an ABLE account but does not receive SSI. The first $100,000 in an ABLE account of an individual that also receives SSI is exempt from being considered a countable resource; however, if an ABLE account exceeds the exempt $100,000 limit, then the individual’s SSI will be suspended until the balance of the ABLE account is back under the limit. Importantly, even if one’s eligibility for SSI is temporarily suspended due to an ABLE account balance over the threshold, the individual is still eligible for Medicaid and many Minnesota aid programs that have asset limits.
An ABLE account may be used to fund qualified disability expenses, which include, but are not limited to:
- Basic living expenses
- Medical expenses, prevention, and wellness
- Vehicle repairs and maintenance
- Legal fees
- Financial management and administration services
- Employment training and support
- Assistive technology
- Personal assistance services
- Oversight and monitoring
- Funeral and burial expenses
If funds of an ABLE account are used for non-qualified expenses there will be hefty consequences. For example, the earnings portion of the withdrawal will be treated as income of the disabled individual, and taxed accordingly, and will also be subject to a 10% federal tax penalty and applicable State taxes. This income treatment may also jeopardize SSI eligibility.
Additionally, upon the passing of the disabled individual, the State may file a claim against the ABLE account equal to the amount in which the State spent on the disabled individual through the State’s Medicaid program, from the time the ABLE account was opened.
Overall, an ABLE account is quite flexible in that it allows for many types of distributions, including housing and other basic living expenses, yet an ABLE account is quite strict when it comes to who can have an ABLE account and the balance of the ABLE account.
Special Needs Trust:
An SNT is a customizable tool used to protect an individual’s eligibility for government benefits when receiving a personal injury settlement of any amount. This is a good option for an individual who is ineligible or not well-suited for an ABLE account (e.g. due to the onset of disability at or after age 26 or is expecting a settlement in excess of $100,000).
Generally, an SNT can be designed for a disabled individual under age 65, who is not in a nursing home, to keep that individual’s SSI eligibility intact while holding over $100,000 in funds. Therefore, it appears eligibility rules are less stringent for an SNT compared to an ABLE account; however, the funding of an SNT and the qualified expenses an SNT can be used for are more stringent than an ABLE account. For example, only the disabled individual, a parent, a grandparent, a legal guardian, or a court can create and direct assets into an individual’s SNT. Also, basic living expenses and housing are not considered qualified expenses since the disabled individual is likely receiving aid for these types of expenses from the government. Therefore, if non-qualified distributions are made for expenses that the government already provides then SSI will be reduced accordingly.
Additionally, upon the passing of the disabled individual, if there are any remaining funds in the SNT, the State will be first due repayment equal to the amount in which the State spent on the disabled individual through the State’s Medicaid program prior to any funds being distributed to a remainder beneficiary.
Overall, an SNT can be tailored to a specific situation, but the distributions are restrictive and administration is complex.
“Spend Down” Method:
When an ABLE account and an SNT do not appear to be well-suited to an individual’s situation, the “spend down” method may be an option.
The term “spend down” describes the process of literally spending the personal injury settlement down to the maximum allowable resource limit ($2,000 for a single person). By spending any excess funds in the month in which they are received, the individual may be able to remain eligible for government benefits. It is important to note that although a spend-down can preserve eligibility for government benefits, it is likely that the individual may need to repay part or all of the SSI benefits for the month in which the personal injury settlement is received. The reason for this is that SSI considers any amount of funds (not provided by the government) to be income in the month received. Moreover, any income not spent in the month of receipt will be countable as a resource in the following month.
If the amount of the excess resources is relatively small, it might make more sense to spend down the settlement as opposed to creating an SNT due to the creation and administration costs associated with the SNT. A spend down could also be a strong option in the situation where the beneficiary has a current need for high-ticket exempt items such as a home, a handicap-modified vehicle, attorney’s fees, travel, or even to pay off debt. If the spend down method appears appropriate it is important to try to get the personal injury settlement as early in the month as possible in order to have more time to spend down the assets before the end of the month so as to not disqualify an individual from another month of SSI.
Overall, the “Spend Down” Method is an alternative to the ABLE account and the SNT, but is also tricky to execute properly in order to not render a disabled individual ineligible for government benefits long-term.
Fortunately, careful planning, consultation, and coordination with both a Personal Injury Attorney and an Estate Planning Attorney may allow an individual to receive a personal injury settlement while ensuring that individual will not lose their eligibility for government benefits. The Attorneys will analyze your specific situation, including your age, disability, and the amount of the personal injury settlement, in order to determine which tool best suits your needs.
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