Understanding the Intersection Between HUD, Personal Injury Settlements, and Special Needs Trusts
If your client has housing assistance through the U.S. Department of Housing & Urban Development (HUD), which includes Section 8 benefits, it is critical from a planning perspective to understand how those benefits work. Not understanding the federal program and the nuances of your client’s local program could result in a variety of issues from inconvenience to your client to loss of a benefit he or she desperately needs.
HUD provides a number of programs to assist low income families, the elderly, and people with disabilities. These programs are federally-funded but administered at the state level through local housing authorities. The best-known of these programs is the Section 8 voucher program. To qualify for the voucher program, the local housing authority will assess a person’s income, net family assets, and family composition.
The local housing authority determines the amount of the voucher based on the above factors and the cost of rent in the local housing market. It is then up to the voucher recipient to find a suitable dwelling for that price (if the rent is higher than the voucher, the recipient pays the excess). The recipient will likely also pay 30-40% of monthly adjusted income.
HUD Section 8 Benefits and Income Guidelines
Section 8 benefits are means-tested but not in the same way as programs like SSI and Medicaid. Those programs consider all income and assets while HUD only looks at income. This includes income produced by assets, or a percentage of assets deemed as income, but not the assets themselves. This means there is no “transfer penalty” resulting in a specific period of ineligibility; however, that does not mean there is no consequence for giving away assets or placing them in an irrevocable trust. Instead, HUD imposes a lookback period of 2 years in which any transfer over $1,000 for less than fair market value is counted as a net family asset. That addition to income could be enough to reduce the renter’s subsidy or disqualify them entirely. Even if the corpus of an irrevocable trust is not countable, the distributions from it might be. Ultimately this means that funds placed in a trust, even a special needs trust, might not be sheltered unless HUD provides an exclusion for the source of the funds.
HUD’s guidelines list the categories of income that are included and excluded. Income generally includes what one would expect it to include: wages, income from a business, interest earned on investments, periodic annuities, etc. Of note are exclusions for lump sums (inheritances, insurance payments, and settlements for personal or property losses) and reimbursement of medical expenses. The lump sum category has an exclusion to the exclusion, however, for payments in lieu of earnings which includes worker’s compensation (meaning these payments are income).
You might be wondering: if personal injury settlements are already excluded from income, why would my client need a trust? The answer is that they might not with respect to their vouchers. However, it’s rare that we encounter a client who qualifies for Section 8 vouchers but has no other means-tested public benefits. Most likely the client would need a trust to protect their SSI,Medicaid, or the means-tested benefits of a family member in the household who might have income deemed to them by the settlement.
HUD Benefits Add Complexity to Special Needs Trust Administration
HUD benefits add a layer of complexity to special needs trust administration due to both the rules and the inconsistent way in which they are applied. Special needs trusts, whether pooled or standalone, must follow certain rules to ensure their beneficiaries do not lose the public benefits. One such rule is that the trust be used only to supplement but not replace or supplant those benefits. In practicality, this means Trustees apply categorical prohibitions. For example, if a beneficiary has SSI, a Trustee may not pay for food or shelter expenses. This is relatively straightforward and simple from an administration perspective.
For a beneficiary with Section 8 vouchers, any regularly-occurring distribution could be counted as income while “sporadic” distributions are excluded. Navigating this rule has created a “best practice” of distributing funds irregularly. This can be achieved by only paying for one-time purchases as opposed to purchases that occur every month such as a cable or cell phone bill. Depending on the nature of the expense, creative solutions can sometimes be utilized such as paying ahead a few months on a bill (varying the number of months each time). Another option is making distributions to an ABLE account. These decisions must be made on a case-by-case basis in full consideration of the beneficiary’s other benefits.
DeCambre v Brookline Housing Authority
Unfortunately, following the rules is not always good enough because local housing agencies interpret the rules differently. One such example is DeCambre v. Brookline Housing Authority (2016), in which the housing authority counted as income distributions from a special needs trust which was funded with proceeds of tort claims. The housing authority’s argument boiled down to an assertion that had the funds gone straight to the beneficiary’s bank account they would have been excluded from income. Because the funds went to an irrevocable trust, they triggered the rule cited above allowing trust distributions to be counted. The housing authority’s arguments were unsuccessful on appeal but important in what they reveal about how a housing authority might interpret rules. Had their argument been successful, a client receiving a personal injury settlement would have to choose between their SSI or Medicaid and housing benefits. Creating an SNT would protect the SSI and Medicaid benefits but likely disqualify the person from housing vouchers; whereas not creating an SNT would preserve the housing benefit but make the person ineligible for their other means-tested benefits. While this issue appears to be largely settled in favor of public benefits recipients, the world of special needs trusts is continually evolving and only time will tell when the next DeCambre will come along.
While the regulations governing public benefits are complex, the HUD regulations are especially so. Protecting a client’s benefits requires at least a basic understanding of the rules, consultation with an experienced planner who can give advice in this area, and a creative trustee who can navigate the rules to your client’s benefit.
 24 C.F.R. § 5.603(b).