Michigan Legislature Eliminates The “Orphan Tax”

Last month, Michigan’s legislature passed House Bill 4750 to eliminate the “orphan tax”; this new law takes effect in October 2026. The orphan tax is the informal name of a long-standing practice whereby many state and local child-welfare agencies collect federal benefits belonging to children in foster care and use those funds to reimburse the state for the cost of the child’s foster care. 

Prior to the passage of this new legislation, children that were wards of the state via MDHHS would receive social security and other benefits that would be paid back to the state for a partial reimbursement for their cost of care. When they emancipate, foster children are often rendered destitute with limited resources to start out on their own beyond charitable organizations such as Friend of Foster Kids. That has recently changed with the new legislation. 

In 2025, thirty-nine governors received letters from the Administration for Children and Families, a federal agency at the US Department of Health and Human Services, calling on them to take immediate action to protect foster youth in their states. The warnings highlighted the pressing issue of state child welfare agencies diverting federal benefits from foster youths. The goal was to retain benefits for foster youths and to preserve and support them as they transition out of being wards of the state.

Michigan heeded the call and acted. House Bill 4750, signed by Governor Whitmer on July 21^st, amends the Foster Care and Adoption Services Act to require DHHS to determine eligibility for federal benefits such as Social Security, VA Benefits, or other federal benefits that a child may not be receiving. 

The new legislation mandates that DHHS identify a representative payee. If no suitable representative payee is available, then DHHS may apply to become the representative payee. If the State of Michigan acts as the payee it looks for other appropriate payees as part of its annual review. 

The new legislation also mandates that when the child reaches 14 years of age -and until the State of Michigan DHHS is no longer the payee- a portion of the benefit be conserved for the minor child for when they are no longer a ward of the state. Michigan will no longer intercept the benefits (i.e. levy an orphan tax) to reimburse the state for the cost of a foster child’s care. 

Conservation requires that a minimum percentage of the child’s benefits not be used to reimburse the state for costs of foster care. The funds are conserved as follows: 

• From age 14 to 15 at least 50%
• From age 16-17, at least 80%
• From age 18-20, 100%

These conserved funds remain the property of the foster youth. When MDHHS terminates its responsibility for the child, the saved benefits are released to the young person upon emancipation. The law also requires MDHHS to carefully monitor federal asset limits (using tools such as special-needs trusts, PASS accounts, or ABLE/529 accounts where appropriate) so that conservation does not jeopardize ongoing eligibility for these benefits.

An annual accounting must be provided to the child, to the appropriate agency, and to the child’s attorney on how the benefits are being used. The new legislation also requires minors 14 years of age and older be provided with basic financial literacy training relative to the use of the conserved funds once they attain emancipation.  The training topics include:

• Defining personal finance concepts
• An explanation of the necessity of personal finance planning
• The ward charts out what are short term intermediate term and long-term financial goals such as buying a used car or placing a deposit down on an appropriate residence. 
• Basic education on credit
• Explaining how the savings will benefit their financial wellbeing in the future. 

Under the new statutory scheme, all conserved funds become property of the foster child. When DHHS terminates responsibility for the emancipated foster child, MDHHS will release the conserved funds to the child. 

By ending the practice of fully intercepting these benefits and requiring meaningful conservation and financial education, the legislation aims to give Michigan’s foster youth a stronger financial foundation as they transition to independence. The conserved resources can support housing, education, transportation, or other critical needs rather than disappearing into the state budget.

Advocates note that former foster youth face disproportionately high rates of homelessness and economic hardship after aging out of the state system. Preserving benefits that rightfully belong to them is one concrete step toward better outcomes.

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