Special Needs Trust & Birth Injury Settlements

A birth injury settlement can be life-changing, but if the money goes directly to a child with disabilities, it can immediately cancel Medicaid and SSI coverage. A special needs trust birth injury settlement arrangement is the primary legal tool families use to preserve those benefits while still putting settlement funds to work. Understanding the options available under federal and Illinois law is essential before any settlement is finalized.

This article provides general legal information; consult a licensed Illinois attorney for advice specific to your situation.

Why a Direct Payment to the Child Is a Problem

Medicaid and Supplemental Security Income (SSI) are means-tested programs. SSI rules under the Social Security Act cut off benefits when a recipient’s countable resources exceed $2,000. If a birth injury settlement is paid directly to a child, or deposited into a standard custodial account, the full amount counts as a resource the moment it is received. Medicaid eligibility follows SSI eligibility for many children, so both programs can be lost at once.

This matters enormously for families of children with cerebral palsy, hypoxic-ischemic encephalopathy, or other serious birth injuries. Medicaid funds ongoing therapies, durable medical equipment, home nursing hours, and prescription medications that can easily exceed $100,000 per year. Losing coverage to receive a settlement, and then spending down that settlement on services Medicaid would have covered, defeats the purpose of the recovery.

The First-Party Special Needs Trust Under 42 U.S.C. § 1396p(d)(4)(A)

Congress created an exception to the Medicaid resource rules at 42 U.S.C. § 1396p(d)(4)(A). A trust established under this provision, commonly called a “(d)(4)(A) trust,” a first-party special needs trust, or a payback trust, allows a disabled person’s own assets, including personal injury and medical malpractice settlement proceeds, to be held in trust without disqualifying the beneficiary from Medicaid or SSI.

Several requirements apply. The beneficiary must be under age 65 at the time the trust is established. The trust must be established by the individual, a parent, grandparent, legal guardian, or court, the 21st Century Cures Act added the disabled individual to that list in 2016. Critically, the trust must contain a “payback” provision stating that upon the beneficiary’s death, any remaining trust assets reimburse the state for Medicaid expenditures made on the beneficiary’s behalf. The SSA’s Program Operations Manual System at SI 01120.203 sets out the SSI requirements in detail.

Within those rules, the trustee can use trust funds for a wide range of supplemental needs, items and services that Medicaid does not cover or does not fully cover: private therapy above Medicaid’s limits, adaptive technology, transportation, recreational programs, home modifications, and travel. The key is that distributions must supplement, not replace, public benefits.

Illinois trusts are governed by the Illinois Trust Code, 760 ILCS 3. Drafting a compliant (d)(4)(A) trust requires attorneys with specialized experience in both special needs planning and the applicable Medicaid and SSI rules, not simply a birth injury litigator. A poorly drafted trust can be disregarded by state Medicaid agencies, putting benefits at risk.

ABLE Accounts as a Complementary Tool

For smaller amounts, ABLE accounts, created under the Achieving a Better Life Experience Act, 26 U.S.C. § 529A, offer a simpler alternative. An ABLE account is a tax-advantaged savings account that does not count as a resource for SSI or Medicaid purposes, up to the account balance cap set by Illinois (currently $500,000 for the account, though SSI only exempts the first $100,000).

Annual contributions to an ABLE account are capped at $20,000 for 2026, an amount adjusted periodically. Beneficiaries must have a disability that began before age 46, the ABLE Age Adjustment Act raised that cutoff from 26 effective January 1, 2026. Funds can be used for a broad range of qualified disability expenses including education, housing, transportation, health, and assistive technology.

ABLE accounts are often described as having no payback requirement, but that is not quite right. Federal law at 26 U.S.C. § 529A(f) directs that on the beneficiary’s death, funds remaining in an ABLE account go to the State up to the total Medicaid assistance paid since the account was opened. Illinois amended its own ABLE statute in 2017 to bar the State from pursuing that claim, but the state provision conflicts directly with federal law and the conflict has not been resolved, so Illinois special needs practitioners generally advise planning as though a payback applies. Even so, ABLE accounts work well alongside a (d)(4)(A) trust: the trust holds the bulk of a large settlement, while the ABLE account provides more flexible, account-holder-controlled spending for day-to-day disability expenses.

Planning Alongside Life Care Costs

Choosing the right trust structure is closely tied to the child’s projected lifetime needs. Detailed birth injury life care planning and costs analysis, developed by nurses, rehabilitation specialists, and economists, identifies the specific services the child will require over a lifetime and the estimated cost of each. That figure drives the settlement demand, and it also determines how much needs to be sheltered in a trust versus what a family can manage through other means.

Settlement negotiations that ignore benefit preservation can leave a family far worse off financially than the gross settlement number suggests. Medicaid set-aside requirements, if applicable, must also be coordinated with the trust structure.

Who Drafts the Trust, and When

Trust drafting must be handled by counsel experienced in special needs planning, not the birth injury litigation team alone. Ideally, a special needs planning attorney is brought into the case before settlement, so the trust can be in place and court-approved (if a minor is involved) at the time the settlement funds are distributed. Illinois courts handling settlements for minors will typically require a guardian ad litem report and judicial approval of the settlement terms, including the proposed trust structure.

Waiting until after settlement to address benefit preservation is a common and costly mistake. Once funds are disbursed to the wrong account, untangling the Medicaid eligibility consequences can take months and may not be fully reversible.

Talk to a Chicago Attorney, Free Consultation

If your child suffered a birth injury and you are considering a claim, benefit preservation is a critical part of the recovery strategy, not an afterthought. The attorneys at Phillips Law Offices in Chicago work with families throughout Illinois and can connect you with the specialists needed to build a complete plan. Call (312) 346-4262 or visit our contact page to schedule a free consultation. There is no fee unless we recover for you.

Protecting Medicaid and Benefits After a Birth Injury Settlement