THE HOME

by Thomas D. Begley, Jr., Esquire, CELA

HOW TO OWN THE HOME

            One of the most significant issues facing every trustee of the special needs trust is housing for the trust beneficiary.  The monthly SSI payment is insufficient in almost every part of the country to provide housing, other than Section 8 Housing, to a trust beneficiary.

Special Needs Trust Purchases Home

            An advantage is that the trust has sufficient liquid assets to pay for the home.  Control is one of the primary benefits of the trust owning the home.  Many beneficiaries of special needs trusts do not have the capacity to manage residential real estate.  By having the trust own the home, the asset is protected and from the temptation on the part of the beneficiary to borrow against the home and overspend.  If the beneficiary is married, trust ownership may protect the home in the event of a divorce.

            A variation on this strategy is to have the trust own the home and have a housemate move in who will pay rent and/or manage the home.  Ownership by the trust avoids the danger that any profit from rental payments be considered income to the beneficiary.

• Sole Benefit Of.  A disadvantage of an SSSNT owning the home is that on the beneficiary’s death the home will have to be sold to repay Medicaid for medical assistance rendered to the beneficiary.  Another disadvantage is that where there is an SSSNT other family members must pay their pro rata share of the operating expenses or some rental because the trust must be “for the sole benefit of” the disabled beneficiary.
• Pro Rata Share.  Because an SSSNT must be for the sole benefit of the person with a disability, if the parent lives in the home they must pay rent and a pro rata share of the operating expenses of the home.
• Legal Obligation of Support.  An SSSNT cannot be used to pay a legal obligation of support for the parent.  Parents have a duty to provide shelter for their minor children and in some states for their disabled adult children.
• Extraordinary Care.            The rules pertaining to a parent’s legal obligation of support do not apply to extraordinary care.  If a parent has quit his/her job to provide the care, does this rise to the level of extraordinary care?  Where there is an issue as to the parent paying a pro rata share of expenses of a home, careful practitioners will have an appraiser determine the fair market rental of the home, and have a care planner estimate the value of the extraordinary caregiving services contributed by the parents.
• Tenancy in Common.  If the parent and disabled child own the property as tenants in common, there may be a lien for Medicaid estate recovery against the interest of the disabled child on the death of the disabled child.
• Trust Acquires Residence.  In situations where the trust is to acquire the residence, the trust document should expressly authorize the acquisition and maintenance of residential real estate.  Otherwise, the home is a wasting asset that is an inappropriate fiduciary investment.

Beneficiary Owns Home

            The advantage is that the home will not be subject to the pay back provision of the trust.  However, it may still be subject to Medicaid estate recovery on the death of the beneficiary, if the beneficiary receives medical assistance after age 55.  The disadvantage of home ownership by the beneficiary is that if the beneficiary is not financially responsible, the beneficiary may mortgage the home, may fail to maintain homeowner’s insurance, or may fail to pay real estate taxes or other expenses.  An incapacitated or minor person should not own a home.

            A disadvantage is that if the beneficiary sells the home and does not buy another one, he has a large countable resource which would disqualify him from SSI unless placed into an SSSNT.  In many instances, the disabled beneficiary is not physically, mentally or emotionally able to care for a home and manage the problems attendant to home ownership.  If the beneficiary has a housemate, the profit from rental payments may count as income to the disabled beneficiary.

            In most states there is no problem with a third-party special needs trust owning the home.  The issues pertaining to sole benefit of and legal obligation of support do not arise.  There is no payback to Medicaid in a third-party special needs trust on the death of the disabled beneficiary.

            Payment of gas, water, taxes, and other home operating expenses would be in-kind support and maintenance (ISM).  The beneficiary would need to pay those expenses from his or her SSI or suffer a PMV reduction if the trust pays them.

Trust Pays for Life Estate in Home with Remainder to Parents

            The advantage is that the trust pays the lion’s share of the purchase price of the home, because the value of the beneficiary’s life estate will be significant based on the beneficiary’s relatively young age.  At age 18, it is .97590.  In some states, there is no estate recovery against a life estate.  State law must be consulted.   The disadvantage is that the parents/spouse must pay for the remainder interest and their share of any home improvements or expansions.

            In some cases, it may make sense to have the trust purchase a life estate in the family home.  In those situations, an appraisal must be obtained to establish that the purchase price was the fair market value.  Consideration must be given to any real estate tax, rebates, credits, deductions or reductions in this situation.  If the parents live in the home, a fair market rental should be paid because a life tenant technically has the right to use and occupy the entire property.

            The reverse of this strategy is often useful where the disabled parent is receiving a settlement, but it is not large enough to warrant establishment of an SSSNT.  Or, if the parent is over age 65, the parent could purchase a life estate in the home of an adult child to protect the settlement.  The adult child would give the parent a deed transferring the life estate.  In those situations the adult child would then pay rent.  The parent must actually reside in the home for a period of at least one year.

            Another variation is to have the trust purchase a life estate in a home and transfer it to the beneficiary as a gift.  The beneficiary’s ownership of an equity share will decrease over time.  So long as the beneficiary resides in the home, it is not a countable asset.  The beneficiary will not own anything subject to estate recovery on death.

Third Party Special Needs Trust

            If a Third Party Special Needs Trust purchases the home, there is no Medicaid payback.  Items owned by a Third Party Special Needs Trust avoid any Medicaid lien, if the beneficiary dies after age 55.

Parents Purchase Home

            The advantage is that there is no Medicaid payback or estate recovery.  The disadvantage is that the parents must pay for the home.  It is sometimes possible for a portion of the personal injury settlement to be allocated to the parent.

            However, if the trust pays rent to the parents, the result may be “circular deeming.”  If the SSI recipient’s parents were also on SSI, the payment of rent from the trust would be income to them, which may disqualify them from SSI. Alternatively, if they are not receiving SSI, the additional income from the rent may increase their income to the point where when it is deemed to the person with a disability it disqualifies the person with a disability from SSI.  Circular deeming applies if the person with a disability is a minor.

            In any event, if the parents provide shelter to the person with a disability, if would be considered in-kind support and maintenance and result in a reduction of the person with a disability’s SSI benefit.

THE HOME AND THE POMS

            If an SSSNT owns a house used as a home for the beneficiary, the house is not a resource to the beneficiary. SSA considers the beneficiary to have an “equitable ownership under a trust.”

            The beneficiary living in the home is not considered to be receiving in-kind support and maintenance in the form of rent-free shelter because he/she has an ownership interest. However, the purchase of the home by the trust results in ISM for the month in which the purchase is made.  The ISM is valued at no more than the Presumed Maximum Value (PMV). If the home is purchased subject to a mortgage, each mortgage payment constitutes ISM. Payment of household operating expenses by the trust also constitutes ISM.  These consist of improvements or renovations, including those renovations needed to make the home handicapped accessible.  However, improvements that increase the value of the home are not considered operating expenses and do not constitute ISM. This may still be a benefit to the person with a disability even with the ISM reduction.  Since the beneficiary has an ownership interest in the home, a business arrangement, in the states that allow it, cannot be used.

            Only the property insurance required by the holder of a mortgage is considered a household cost.  Insurance held at the owner's or renter's option is not a household cost.

            There are certain noncountable resources that can be purchased by the trustee, such as a home to be used as the disabled individual's principal residence, or an automobile.