Special Needs Trust- Determination of Annual Income

Managers of affordable housing properties (e.g., Section 8 or LIHTC) must consider whether a household has assets that may contribute to the income of the household. Common assets include cash-on-hand, bank accounts, and retirement accounts. A less common type of asset is a “trust.” A trust is a legal arrangement generally regulated by state law in which one party (the creator or grantor) transfers property to a second party (the trustee) who holds the property for the benefit of one or more third parties (the beneficiaries). A trust can contain cash or other liquid assets or real or personal property that could be turned into cash. Generally, the assets are invested for the benefit of the beneficiaries.

Trusts may be revocable or nonrevocable. A revocable trust is a trust that the grantor of the trust may amend or end (revoke). When there is a revocable trust, the grantor has access to the funds in the trust account. When the grantor sets up a nonrevocable trust, the grantor has no access to the funds in the account.

The beneficiary frequently will be unable to touch any of the trust funds until a specified date or event (e.g., the beneficiary’s 21st birthday or the death of the grantor). In some instances, the beneficiary may receive the regular investment income from the trust but is unable to withdraw any of the principal.

How to Treat Trusts

The decision on how to handle a trust depends on who has access to either the principal in the account or the income from the account. If any member of the tenant family has the right to withdraw funds from the account, the trust is considered to be an asset and is treated as any other asset. If no family member has access to either the principal or income of the trust at the current time (or within the upcoming 12-months of the certification year), the trust is not included in the calculation of income from assets or in actual income. If only the income (and none of the principal) from the trust is currently available to a family member, the income is counted in annual income, but the trust is not included in the calculation of income from assets.

Special Needs Trusts

A special needs trust (SNT) is a trust that may be created under most state laws, often by family members for disabled persons who are not able to make financial decisions for themselves. Generally, the assets within the trust are not accessible to the beneficiary.

  1. If the beneficiary does not have access to income from the trust, then it is not counted as part of the income.
  2. If income from the trust is paid to the beneficiary regularly, those payments are counted as income.

This is the extent of the guidance from HUD regarding Special Needs Trusts in Handbook 4350.3. Unfortunately, the guidance creates more questions than it answers, such as:

  1. What is considered “income from the trust?” Technically, income from the trust would be income generated “by” the trust, such as interest or dividends. Payment of principal from the trust to the beneficiary would be a “distribution,” but may not be actual income from the trust.
  2. If distributions from the trust are counted as income, what if the principal in the trust was put into the trust by the household and was already counted as income for the household?
    1. Example: A special needs trust is established by a family for a disabled child. The family funds the trust with income earned from employment, which is counted as income when earned. Years later, the family member who created the trust dies and the trustee begins using the funds in the trust to cover expenses of the disabled child. If these distributions are counted as income, the income would essentially have been counted twice.

Recommendations When Dealing with a Special Needs Trust

Based on available HUD guidance, we do know with some degree of confidence how to handle disbursements from Special Needs Trusts in certain circumstances:

  1. Direct distributions from a SNT may be excluded from annual income if the payment/income is “temporary, nonrecurring or sporadic.” [See 24 CFR 5.609(e)(9).
  2. Amounts specifically excluded by any other Federal statute from consideration as income for purposes of determining eligibility or benefits under a category of assistance programs that includes assistance under any program to which the exclusions set forth in 24 CFR 5.609(e) apply.

Whether the income distributed by Trustees to or for the benefit of a beneficiary is or will be counted as annual income depends upon the nature of the expenditure or distribution and the frequency. Depending on the purpose and/or manner of payment a distribution may or may not rise to the definition of “income” subject to inclusion in an annual income determination.

We do know that based on HUD’s clear definition of income in both regulation and the HUD 4350.3, income includes amounts which “go to, or on behalf of (emphasis added) the family head or spouse (even if temporarily absent) or to any other family member.” This appears to clearly indicate that money paid on behalf of a household (not just directly to a household) may be counted as income.

Based on all available guidance regarding the treatment of disbursements from Special Needs Trusts, I make the following recommendations:

  1. If the money that is placed into a SNT would be excluded when originally received (e.g., a lump sum settlement), it should not be counted when disbursed from the SNT. (This recommendation is supported by a court’s decision in Decambre v. Brookline Housing Authority, et. al., June 2016).
  2. If the money in a SNT came from the household in which the trust beneficiary lives and would have counted as income when originally received, distributions of principal should not count until the full amount contributed to the SNT has been paid out. This recommendation is also supported by the court decision in the Decambre case cited above and 24 CFR §5.609(b)(3).
  3. If the income generated by the SNT (i.e., interest or dividends) is paid to the beneficiary and is not specifically excluded by federal regulation (e.g., direct reimbursement of medical expenses), it should be counted as income for the household.
  4. If principal from the SNT is disbursed to the beneficiary, it should be counted as income unless:
    1. The funds were contributed to the SNT by the household in which the beneficiary lives and either
      1. Would have been counted as income when received by the household, such as wages, or
      1. Would have been excluded from income if received directly by the household (e.g., lump sum payments).
  5. Finally, for properties with Low-Income Housing Tax Credits, when in doubt as to whether or not to count income distributed from a SNT, consult the Housing Finance Agency responsible for monitoring the tax credit property for compliance with IRS regulations.