The Voice is the e-mail newsletter of The Special Needs Alliance. This installment was written by Massachusetts Special Needs Alliance member Emily S. Starr, an attorney with Starr Vander Linden LLC with offices in Worcester & Fitchburg, Massachusetts. Her practice focuses on estate planning, elder law, and government benefits issues for families which include individuals with special needs. Emily is a Fellow of the National Academy of Elder Law Attorneys, the 2007 recipient of The Theresa Award, a national honor recognizing extraordinary contributions of attorneys to the community of individuals with disabilities, and a recipient of the 2008 Scholar Mentor Award from Massachusetts Continuing Legal Education, Inc.
The federal and state governments subsidize housing for elderly persons and individuals with disabilities. The subsidies come in the form of below-market rent units in public and private housing developments and Section 8 vouchers for use in the private market. Tenants in subsidized housing typically pay rent of 30% to 40% of monthly adjusted income.
Some disabled individuals are beneficiaries of special needs trusts. These trusts are of two types: third party trusts, created either by third parties (the beneficiary’s parents, siblings or others) and funded with the third parties’ contributions, and first party trusts, created by the disabled persons themselves (or others on their behalf) and funded with their own assets. Generally the goal of these trusts is to allow the beneficiary to qualify for income from the Supplemental Security Income (SSI) program and for Medicaid. Beneficiaries of such trusts who live in subsidized housing often ask “How does a special needs trust affect my eligibility for subsidized housing and the amount of my rent?”
Subsidized Housing Eligibility Rules
To understand the effect of a trust on eligibility, it is essential to understand the housing eligibility rules. Unlike many public benefits programs, the federal housing programs, most notably the Section 8 program, determine financial eligibility based only on income. There is no asset limit to qualify for the rent subsidy. Rent is based on a percentage of the tenant’s income. As the tenant’s income increases, the thirty percent of income allocated to rent will increase proportionally. At some point the increased rent could equal or exceed the fair market rental value for the unit, making the subsidy meaningless.
To determine the income derived from net family assets the rules require the housing agency to consider the greater of (1) actual income derived from all net family assets or (2) a percentage of the value based on the current passbook savings rate. Many subsidized housing programs have used an imputed passbook savings rate of 2% for many years even though that rate is high in today’s financial market.
For example, if a tenant has $50,000 in the bank earning 3% interest, the tenant will be considered to be receiving $1,500 annually ($125 mo). Thirty percent of that additional income plus other monthly income would be the tenant’s monthly rent. If the tenant owns vacant land with a value of $50,000, income will be imputed based on the passbook savings rate even though the asset generates no actual monthly rental income for the tenant. If the housing program is using an imputed interest rate of 2%, then $1,000 annually ($83.33 month) will be imputed as income to the tenant for purposes of calculating the rent.
How Funding a Trust Can Affect Rent
When a subsidized housing tenant receives a lump sum, concerns often arise about how that will affect eligibility for the subsidized housing benefit. The tenant may be receiving other government benefits in addition to subsidized housing that will also be affected by the lump sum.
The consequences of giving away assets for federally subsidized housing are different from the consequences of giving away assets for the Medicaid and SSI programs. Because assets do not count in the determination of eligibility, the subsidized housing rules do not impose eligibility penalties on individuals who have given away assets. However, net family assets include the value of assets disposed of for less than fair market value during the preceding two years unless the total fair market value of the gifts is $1,000 or less. This includes assets placed in an irrevocable trust except when the assets were received through a lawsuit settlement or judgment.
If a tenant receives a bequest of $50,000 and transfers it to special needs trust, for example, and if the bequest is earning interest at a rate of 2%, a transfer of the $50,000 bequest to the special needs trust will result in the beneficiary being deemed to receive income of $1,000 per year (or $83.33 per month) for two years following the transfer. If the tenant receives a lawsuit settlement of $50,000 and puts the funds into a special needs trust, no income should be imputed from the transfer.
The existence of a trust, just as the existence of any asset, has no direct impact on eligibility for subsidized housing. A trust can, however, impact eligibility in one of two ways depending upon the terms of the trust.
Regular recurring payments from a trust for the benefit of the tenant may be treated as income to the tenant even though no cash is paid directly to the tenant. For example, if the trustee pays a $200 utility bill every month, that payment may be treated as regular recurring income to the tenant. The tenant’s countable monthly income will thus be $200 higher and will result in an increased rental payment of approximately $66. There is an exception for the value of groceries provided by a non-household member, which presumably would include a trustee.
Because distributions from a trust are considered income, and because income affects eligibility and the rental calculation, the trust beneficiary is often at a disadvantage compared to a tenant who owns assets of equal value in the tenant’s own name. If a tenant owns the assets, then the only impact on eligibility and the rental calculation is the income generated by or imputed from the assets. If the tenant pays a $200 utility bill every month out of the tenant’s savings account, that is not treated as income for purposes of calculating the rent. If the assets are instead in a special needs trust for the tenant, and the trustee pays the same $200 utility bill every month from the trust, the tenant is considered to have $200 of additional income every month, thereby increasing the monthly rent. If eligibility for SSI, Medicaid or other need based benefits is not a concern, then consideration should be given as to whether a special needs trust is the best option for the tenant.
Not All Income Is “Income”
Federal regulations exclude temporary, nonrecurring or sporadic income (including gifts) from the definition of income. Thus, to maintain a beneficiary’s lower rent the trustee of a special needs trust should be advised to make irregular distributions on behalf of the trust beneficiary rather than recurring payments. For example, in one month the trustee might pay $400 toward that $200 current utility bill and a credit toward the next month’s bill. Then several months later the trustee might pay for six months of cable TV or take the beneficiary shopping for clothing.
With creative budgeting, it is possible to administer a special needs trust without causing an increase in the beneficiary’s rent. If possible, the trustee should make large onetime expenditures and leave regular recurring expenses for the tenant to pay. This strategy provides more total benefit to the tenant/beneficiary by maintaining eligibility for the lowest monthly rent, thus enabling the individual’s funds to stretch further.
For some people with disabilities, a subsidized housing benefit may be as important or more important than income or medical benefits they receive. A special needs attorney can help evaluate the impact of a lawsuit settlement or inheritance on this benefit, whether a special needs trust is advisable, and how to administer the trust to minimize the impact on the tenant’s rent.
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