Since The ABLE Act created IRC 529A in 2014, ABLE accounts have become popular financial and settlement planning tools for qualifying disabled individuals.
The ABLE Act allows states to create tax-advantaged savings programs for eligible people with disabilities that began prior to age 26. Funds from these 529A ABLE accounts can help designated beneficiaries pay for qualified disability expenses. Distributions are tax-free if used for qualified disability expenses.
From both a public policy perspective, and from more practical administrative considerations, direct payment of structured settlements into ABLE account would appear to be beneficial to all stakeholders – and likewise would create a strategic new market for structured settlements.
Unfortunately, as explained in this earlier article regarding the most recent ABLE POMS update, the Social Security Administration (SSA) views structured settlements as analogous to “benefit payments” and/or “mandatory support payments” thereby constituting income under Social Security law. As a result, direct funding of structured settlements into an ABLE account can disqualify a beneficiary from receiving SSI, Medicaid, and other means-tested public benefits.
Although the National Structured Settlement Trade Association (NSSTA) has considered alternative lobbying strategies to address this problem, NSSTA has not initiated any responsive political action to date. David Lillesand, a nationally renowned, Florida-based, special needs attorney, has suggested that the optimum solution would be a federal statutory change that all structured settlement payments were designated as “exempt resources” for SSI eligibility purposes just as they are exempt from federal income tax.
In the meantime, while the structured settlement, settlement planning, and special needs professionals await a more comprehensive legislative or regulatory fix, David, has devised an ingenious potential solution to enable “direct funding” of ABLE accounts with structured settlements.
David, who guest authors the section of “Structured Settlements and Periodic Payment Judgments” addressing ABLE accounts, first shared his ideas with members of the Academy of Special Needs Planners (ASNP) in their list serve. He separately shared his ideas with this writer, who is also a member of ASNP, and granted this writer and Independent Life permission to publish the following summary.
Understanding the Issues
To understand the issues which create the problem of “direct funding” ABLE accounts with structured settlements, first consider a $1,250 per month ($15,000 per year) structured settlement. Note: $15,000 represents the maximum current annual income tax-free contribution allowed to an ABLE account.
The Social Security Administration (SSA) categorizes countable income into four groups:
- earned income (wages from work which gets a 50% discount)
- deemed income (income from a spouse or parental guardian with whom the recipient lives)
- in kind support and maintenance (the ten food and shelter items that trigger a deduction from the SSI check capped at 1/3 of the SSI Federal Benefit Rate)
- “unearned income” – which is everything else including gifts, Title 2 SSDI, pensions, inheritances, and personal injury settlements.
The SSA views paying a structured settlement directly to an ABLE account the same as paying it directly to a child or to an adult child’s personal checking account (that is, countable) because by federal law, the ABLE account is regarded as “owned” by the disabled beneficiary of the ABLE account. POMS SI01130.740.B.3. Sufficient countable income (a very low threshold) eliminates the claimant’s SSI, which also jeopardizes Medicaid in all “SSI Medicaid states.”
A commonly used workaround is to use a Special Needs Trust (SNT) to indirectly fund an ABLE account with a structured settlement by first funding the SNT and then, under the 2018 POMS for trusts, allow the trustee to fund the ABLE account. The reason structured settlement payments can be made to an SNT, and not an ABLE account, is the SNT is not “owned” by the SSI claimant, and earnings like annuity payments to the trust do not count as income to the SSI claimant, but rather as income of the exempt SNT.
Using the maximum amount of income ($15,000) as an example, a monthly structured settlement payment of $1,250 would result in “countable unearned income” of $1,230 subtracted from the maximum federal Social Security Income (SSI) check of $783, leaving no SSI benefit for each month of the calendar year. Note: As a deduction from “unearned income” (including receipt of the structured settlement annuity), the SSA subtracts the “$20 general income disregard” which explains the $1,230.
David also points out: assigning structured settlements payment via a court order to the annuity provider doesn’t solve the Social Security income problem. Having the annuity payment, whether irrevocably assigned by court order or otherwise, paid by the structured settlement annuity provider directly to the SSI claimant’s ABLE account still counts first as “countable income” under Social Security Law. See POMS SI 01130.740.C.1.a “An individual cannot use direct deposit to avoid income counting.”
The Proposed Solution
As a rationale for his proposed solution to allow “direct funding” of ABLE account with structured settlements, David explains: our mutual “best interest” personal injury settlement planning goal should be “to eliminate as many expenses (guardianship fees, trust drafting attorney fees, trustee fees, etc.) as possible” to ensure the injured client receives as much as possible of the full benefits of their personal injury settlement.
Therefore, David recommends the $15,000 structured settlement annuity be paid once each year to the SSI beneficiary to place in the ABLE account. It will, of course, count as SSI income in the month of January and create a one month SSI overpayment of (currently) $783.
However, and here is the key to David’s proposed solution, the POMS on overpayments provide that when an overpayment amount is less than $1,000, the SSI claimant or their representative can ask that SSA waive the overpayment. (“If the original overpayment, not the balance, is $1,000.00 or less, the recipient, representative payee, or other authorized representative may make a verbal waiver request”.)
The receipt of $15,000 is not averaged over the twelve months and is counted as “unearned income” only in the month of receipt. Since the maximum federal SSI payment is less than $1,000 it qualifies for SSA waiver.
SSA will waive the recovery because the administrative cost of collecting an overpayment of less than $1,000 exceeds the value of the collection. However, it is essential for the SSI claimant or their representative or attorney to ask to have the small overpayment waived under that provision in the POMS. Otherwise, the SSA computer will automatically recover the overpaid amount from the next ten SSI checks. See: POMS SI 02260.030.B.
“2. A recipient requests a waiver or reconsideration – and the original overpayment amount is $1,000.00 or less
“a. Effective September 27, 2008, we may administratively waive recovery or adjustment, i.e., administratively discontinue waiver development, on an overpayment if the original amount (not the balance) is $1,000.00 or less.
“b. We do not use administrative waiver development discontinuance policy unless the recipient (or representative) makes a specific written or oral request for waiver or reconsideration.
“c. If the recipient requests a waiver or reconsideration and the amount of the original overpayment (not the outstanding overpayment balance) is $1,000.00 or less, we administratively discontinue waiver development unless, from the facts apparent on the face of the waiver or reconsideration request, we believe there is an indication of fault on the part of the overpaid recipient. In such a case, we will conduct full waiver or reconsideration development.”
To summarize: in addition to solving the “direct funding” structured settlement problem, in a carefully planned case, David’s proposed technique would allow qualified clients to benefit with reduced fees: 1) to the special needs planning attorney to draft an SNT; 2) ongoing fees to a trustee; 3) annual fees to a CPA for a trust tax return; and 4) in the case of minors and incapacitated persons, to a guardianship court filing fee and annual reporting fees, as well as guardianship attorney fees.
Although David is a special needs attorney himself, he acknowledges delight in finding more ways that his professional services are not needed so settlement funds get to the person for whom they are attended.
Until a legislative or regulatory solution allows the direct funding of ABLE accounts with structured settlements, creative settlement planning solutions are needed to maximize benefits qualified injury victims can receive from these two seemingly complementary governmental programs.
Because every state has its own Medicaid agencies and state-specific rules, structured settlement and settlement planning professionals must work carefully with special needs attorneys to discuss the viability of David Lillesand’s proposed “direct funding” solution to case specific opportunities.
Contact Independent Life for additional information including increased opportunities for collaboration between settlement planners and special needs attorneys.
TAX & LEGAL DISCLOSURE: Information contained herein is not intended to be case specific tax or legal advice nor is it intended or written to be used, and cannot be used, for the purpose of avoiding any tax or social security penalties. You should seek advice based on your particular circumstances from an independent tax or legal advisor if you have tax or legal related questions.