CAPSULES: The Devil Is in the Details

Housing Issues in Special Needs Trusts

By Martha C. Brown, CELA, CAP

Houses and special needs trusts have a special relationship that is fraught with difficulty, execution, and maintenance.

In this issue’s CAPsules column, NAELA member Martha C. Brown, CELA, CAP, addresses the questions parents often ask Special Needs Planners about using funds in a special needs trust to buy a house for the beneficiary. The full article is somewhat longer than can be published in the print NAELA News. Below is a synopsis of the article written by NAELA News Editorial Board member Jan Zager.

The full article by Martha C. Brown can be found at www.NAELA.org/NAELANewsOnline. You’ll find the link on the landing page.

Consider these six fundamental questions to formulate a realistic housing plan:

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1. Should it be this house?
Is this an appropriate house both financially and practically? Consider not only the purchase price, but also due diligence issues of home inspection, appraisals as well as taxes, insurance, utilities, and maintenance. Is this particular house accessible and safe? Would a modification be feasible or economically appropriate?
2. Should it be financed or bought outright?
Financing the purchase is a possibility, but take into account that neither the trustee nor the beneficiary may qualify for a loan because of concern about the trust’s holding title or, conversely, because the beneficiary is not considered credit worthy. If a loan is possible, consider whether the beneficiary has sufficient monthly income to make the mortgage payments and other carrying expenses. Timing of loans is important to avoid affecting benefits; the home must be purchased in the same month as the proceeds of the loan are received.
3. Who should own it?
If a Trust with pay-back requirements holds title to the house, remember that a Medicaid program would look to the trust for reimbursement after the death of the beneficiary. Alternatively, although a residence is an exempt asset, Medicaid agencies may have the right to seek recovery for services provided to beneficiary homeowners over 55. Consider also that a beneficiary with impaired judgment may be susceptible to financial exploitation or simply be unable to manage the day-to-day problems of home ownership.2
4. Who can live in it?
It might be necessary to charge rent for residents of the house apart from the beneficiary if the house is owned by a First Person/Self-Settled Trust. This becomes more complex when the non-beneficiary residents provide essential personal care or assistance to the trust beneficiary.
5. How does it affect the beneficiary’s SSI payment?
Home ownership has minimal effect on monthly benefits but is subject to the rules of in-kind Support and Maintenance (ISM). While the purchase itself affects benefits only in the first month (as ISM rent), there would be ongoing ISM issues if the Trust pays for property taxes, homeowners’ insurance, or utilities.
6. Can the Trust sell it?
Sale of a trust-owned house will not have an effect on the beneficiary’s benefits. With a beneficiary-owner, proceeds must be reinvested in a replacement home within three months. Homes owned by First Party Special Needs Trusts can use the trust beneficiary’s right for capital gain’s exclusion if applicable, but this is not available for Third Party Trusts.

There’s much more in the full article online. As Martha Brown says, “The devil is in the details.”

Martha C. Brown, CELA, CAP, is a NAELA Fellow and a member of the Council of Advanced Practitioners. The CAPsules column is provided by members of the Council of Advanced Practitioners (CAP). Synopsis by NAELA News Editorial Board member Jan Zager, Esq.