THE IMPACT OF SPECIAL NEEDS TRUST DISTRIBUTIONS ON SECTION 8 HOUSING
by: Begley Law Group
by Thomas D. Begley, Jr., CELA
[Article originally published in Straight Word] There are two parts of Section 8 Housing. One is tenant-based in existing privately-owned units where the benefit follows the tenant. The other is project-based in a multi-unit building where the tenant loses the subsidy upon departure. Most Section 8 is tenant based and is known as the “Housing Choice Voucher Program” (HCVP). Generally, tenants must contribute 30% of their adjusted annual income toward rent. Annual income includes: employment wages, salaries, public benefits, disbursements from pensions and investments. There is no mention of trusts. Specifically excluded from “income” are lump sum additions to assets, medical expenses, temporary, non-recurring, or sporadic income, including gifts. Lump sum additions to assets include inheritances, insurance payments, capital gains and also personal injury settlements. However, if the personal injury settlement includes a structured settlement where payments are periodic, it is unclear whether this would be considered a lump sum and, therefore, excludable as income. Assets are not directly counted for purposes of HCVP, but income is imputed from those assets. For HCVPs, the Public Housing Authorities (PHAs) may set their own HUD passbook rate within .75% of the FDIC savings national rate. Apparently, the FDIC national savings rate is .06%, so the HVIC rate can be as high as .81% or as low as 0%. If an asset is transferred, then for two years or after income is still imputed from that asset.
Any income distributed by a trust fund shall be counted when determining annual income.[1]
In a recent case,[2] the court held that distributions of principal from a First-Party Special Needs Trust should be counted as income for purposes of HCVP benefits. Kimberly DeCambre was a resident of Section 8 Housing for many years. She participated in the HCVP program. She received both SSI and Medicaid. She was also the beneficiary of a Self-Settled Special Needs Trust funded with personal injury settlement proceeds. On December 1, 2012, the Housing Authority increased her monthly rent from $312 per month to $435 per month explaining that certain disbursements from her trust could not be classified as exempt medical expenses. In the Fall of 2013, the Authority determined that DeCambre was no longer eligible to receive housing assistance, because her income was too high. Between 2011 and 2013, she received approximately $200,000 in distributions from the trust. These distributions included cost for care of her cats, which she argued should be characterized as medical expenses. She argued that her car was a medical necessity, and that her cell phone and landline were needed in case of emergency due to her “medically precarious condition.” The court found that DeCambre had used principal from the trust to pay for an automobile, travel expenses, cat veterinary care, and dental and medical fees. The court pointed out that case law includes “television, Internet and travel expenses” as something Special Needs Trusts should cover. The Opinion upheld the Housing Authority’s determination in terminating DeCambre’s Section 8 eligibility on grounds that her income exceeded Section 8 Housing eligibility limits.
Six legal questions arise from the decision:
- What is the legal significance of a transfer into a trust: third-party v. first-party?
- What is the legal impact of the assets once transferred into a trust?
- What is the legal effect of trust distributions: first-party v. third-party, principal v. income?
- Was the Finley case in California wrongly decided?
- Was the DeCambre court justified in relying on the PHA interpretation?
- How much of DeCambre is based on bad facts making bad law?
The PHA has authority to count the deemed income of the assets transferred into the trust at the HUD passbook rate. However, if the PHA also counts the income distributed by the trust as additional income, it is counting the same income twice. It should also be noted that the DeCambre court cited the Subsidized Multi-Family Housing Program Handbook rather than the HCVP Guidelines.
The most controversial issue is whether a PHA should count distributions of both principal and income as “income” for purposes of determining a tenant’s subsidy and income eligibility. Let’s assume the tenant received $200,000 in the settlement of a personal injury case. Let’s assume the tenant put the money under the mattress and used it to pay expenses. The PHA would correctly impute the HUD passbook rate to the $200,000, but the expenditure of the $200,000 would not be counted as income to the tenant.
The issue is where there is a First-Party Special Needs Trust, should the income countable to the beneficiary be limited to the income earned by the trust rather than the principal, which the beneficiary has placed into his own trust. Most of the distribution is what the tenant put into the trust to begin with. Why should the trust convert a non-countable receipt into income?
The answer would probably be different if the trust were a Third-Party Trust, because that trust would have been funded by the assets of someone other than the tenant. In the Finley case,[3] the California court stated that Finley’s settlement funds were excluded under the lump-sum receipt rule and that only the investment income that is distributed is countable income for HUD housing purposes. The real issue is whether income from a trust fund should be limited to trust accounting income rather than just a distribution from the trust.
[1] 24 C.F.R. §603(b)(2).
[2] DeCambre v. Brookline Housing Authority, U.S. District Court for the District of Massachusetts (Mar. 25, 2015).
[3] Finley v. City of Santa Monica, No. BS 127077 (Cal. Sup. Ct. County of Los Angeles (May 25, 2011)).