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I frequently am asked whether a Special Needs Trust can or should purchase a residence for the special needs trust beneficiary.

I recently came across a great article in The Voice about this very topic written by Attorney Martha C. Brown (no relation) a special needs attorney in Missouri While this Attorney Brown practices in Missouri, and not California, her article is very well written and addresses the same issues that a California special needs trust should consider before it purchases a residence.  I am posting the article in its entirety below.

The Voice is the email newsletter of The Special Needs Alliance. This installment was written by Special Needs Alliance member Martha C. Brown, at the St. Louis, Missouri law firm of Martha C. Brown & Associates, LLC. She limits her practice to elder law and special needs law. A Fellow of the National Academy of Elder Law Attorneys and a Certified Elder Law Attorney, Martha has been designated a Super Lawyer in Kansas City Magazine for the last five years. Through her continuing legal education presentations and community presentations, Martha helps attorneys and the public understand and address legal issues concerning the elderly and people with disabilities.

 

 


Buying a House for a Special Needs Beneficiary: Proceed with Care!

 

One common question asked of attorneys who assist families with special needs trusts is, "should the special needs trust own a house?" Unfortunately, there is no simple answer to that question. To assist families in making this decision, this article addresses the various factors that must be considered.

1. Is the home subject to the Medicaid payback provision?

Some special needs trusts hold funds that came from family members, but other special needs trusts hold funds that belonged to the beneficiary. If the trust funds originated with the beneficiary, these are called "first party" special needs trusts—and these trusts have Medicaid payback provisions. This means that at the time of the beneficiary's death, the special needs trust must reimburse the Medicaid program for all expenditures made for the beneficiary during his or her lifetime. If the house is owned by the special needs trust, then the house will be part of the trust assets available to pay Medicaid back. This is particularly troublesome when the home is the residence of the beneficiary and the beneficiary's family as well. When the beneficiary dies, the house may have to be sold to reimburse Medicaid for the payments made during the beneficiary's lifetime. Obviously, this can be detrimental to a family that has made the house the family home for many years.

One alternative in most states would be for the Medicaid recipient to own the house individually. The house could be purchased with funds from the special needs trust, but title to the house would be in the name of the beneficiary. This works well when the beneficiary is under the age of 55. Under federal Medicaid law, after age 54 the state has the right to make a claim against property owned by a Medicaid recipient following the Medicaid recipient's death – but only for reimbursement of services received after age 54. There are variations in federal and state law regarding how Medicaid would recover from property owned by the Medicaid recipient. If the Medicaid recipient is much younger than 55, owning the house outright might be more appropriate than having the special needs trust own the home. Outright ownership gives the Medicaid recipient more control and stability and can be a source of pride and dignity. A married Medicaid recipient would have the additional advantage of being able to protect the home for the spouse and minor or disabled children.

2. Is the home a good purchase? Can the house be adapted for use?

Many trust beneficiaries or trustees enter into the purchase of a home with great enthusiasm. What is commonly called "due diligence" is required of all homebuyers, including the trustee. As with all home purchases, it is important to perform home inspections, obtain appraisals, and determine the appropriate offer.

The beneficiary and trustee must look at the home itself to make sure that it is the appropriate home for the beneficiary given his or her disability. Obviously, someone who is unable to walk cannot use a bedroom on the second floor; likewise someone in a wheelchair needs more than a bathroom with only a bathtub. Those modifications must be considered to determine whether it is economically feasible for that beneficiary to live in the home. The special needs trust can pay for necessary modifications to make a home accessible for the beneficiary. The trustee must make an economic decision whether or not the cost of the modifications outweighs the value of the house. In other words, the cost of the modification may be greater than the value of the home, making it economically inappropriate to purchase and modify the home.

3. Should the trust borrow money to purchase the home?

There are benefits to financing the purchase of the home with a mortgage company or a bank, and there also are reasons it is not wise to do so. A mortgage (or a loan) is not countable income for purposes of Supplemental Security Income (SSI) or Medicaid eligibility, and the receipt of loan proceeds will not affect monthly benefits received. The loan proceeds must be used to purchase the home in the month that the loan was obtained. When the house is purchased with a mortgage, the money does not belong to the beneficiary; the mortgage is being used to assist the purchase rather than creating a resource that will affect the beneficiary's benefits in the future.

A mortgage will limit the amount of money that can be attached by a Medicaid lien to recoup benefits upon the beneficiary's death. The mortgage will have priority over the Medicaid lien in most cases. But, as with all financing, the mortgage must be paid. The beneficiary may not have the monthly income to make the mortgage payment. In those situations, it will be better for the trust to buy the home outright. As a practical matter, it can be difficult for a trustee to qualify for a loan to purchase a home that will be held as a trust asset. If the beneficiary is going to own the home individually, it may be hard to qualify for a mortgage because of low income, poor credit or non-existent credit.

4. Who can live in the house owned by the special needs trust?

Some individuals with a disability live with other family members so that they can receive assistance with their personal care needs. If the house is owned by the special needs trust, questions arise concerning rental payments from parents or other residents who live in the home. This is a complex issue that needs to be answered according to specific state law and with Medicaid and SSI rules in mind. The questions about occupancy and rent become harder when the trust is subject to court supervision. Individual judges may have different opinions as to who may live in a home owned by a special needs trust and what rental provisions may be required of all the residents of the home. The trustee of a court-supervised trust may want to seek prior court approval of any decisions about rent and occupancy.

Under the SSI and Medicaid rules, a trust funded with assets belonging to the beneficiary must be maintained for the sole benefit of the beneficiary. For these first party trusts, the trustee may need to charge rent to residents of the home other than the beneficiary to ensure that the trust is administered for the sole benefit of the beneficiary. It is important to explore these questions and solve them prior to the purchase of the home and the determination of who will reside in the home. These questions become more complicated when other residents of the home assist in providing personal care to the beneficiary, thus enabling the beneficiary to live in the home. In those situations there is a benefit to the beneficiary and rent may not be required.

5. If a special needs trust owns a home, how will the beneficiary's SSI be affected?

Answering this question requires an understanding of the SSI rules governing in-kind support and maintenance (ISM). SSI benefits are intended to provide the recipient's food and shelter. Accordingly, if someone gives an SSI recipient food or shelter for free or charges less than what the food or shelter is worth, the Social Security Administration counts the value of the benefit as ISM, and the beneficiary will receive a reduction in benefit for one-third of the value of the free food or shelter up to a maximum of $244.66 per month for a single person in 2011. This is called the Presumed Maximum Value (PMV). For example, if an adult SSI recipient is living in an apartment and his parents are paying his rent valued at $800 per month, his SSI will be reduced by $244.66 each month. If they were paying only $100 of his rent, then his benefit would be reduced only by $100.

Keeping in mind the ISM and PMV rules, if the beneficiary lives in a home that his or her trust owns:

  • Is the home a resource for SSI? No. Since the assets in the trust are not counted, the house is not counted. It is an exempt resource. In fact, SSI considers the beneficiary to hold an equitable ownership interest in the home.
  • What happens the month the Trustee purchases the home? SSI considers that the purchase of the home by the Trustee results in ISM in the form of shelter. Therefore, in the month the home is purchased by the trustee, the beneficiary's SSI benefit will be reduced by no more than the PMV.
  • May the beneficiary live in the home without paying rent? Yes. Since the home is not a resource and since the beneficiary has an equitable interest in the home, the beneficiary may live there rent-free and it will not affect SSI payments. It is not considered to be ISM.
  • What if the Trustee is making mortgage payments? Payment of the monthly mortgage by the trust is a disbursement from the trust to a third party that results in the receipt of ISM in the form of shelter. Therefore, for each month in which a mortgage payment is made, SSI payments will be reduced no more than the PMV.
  • What if the Trustee pays household expenses? If the trust pays for property taxes, homeowners insurance, heat, electricity, water, sewer, or garbage removal, these payments would be income in the form of ISM. For the months in which these payments are made, SSI payments will be reduced by no more than the PMV.

6. What becomes of the home if there is a later decision to sell it?

Often families will decide that the amount of work involved in maintaining the residence is too great. Snow removal, lawn care, routine maintenance, major repairs, and the like may prove to be too labor-intensive for the family situation, leading the family to want to sell the residence. The decision belongs to the owner, which may be the trustee rather than the beneficiary or the family. To avoid the wastefulness in two sets of closing costs and costs of home modifications which may never be fully recovered in a later sale, the discussion of those labor tasks needs to happen prior to the purchase of the home. In some situations there may be no one in the family able to perform maintenance tasks. In those situations, it might be more appropriate to rent, rather than to buy.

Once the home is sold, however, there must be a discussion about who receives the sale proceeds. If the special needs trust owns the home, the trust receives the money and benefits are not affected. If the beneficiary owns the home outright, the beneficiary receives the money from the sale of the home. Under SSI rules, if the beneficiary owns the home, the sale proceeds must be reinvested in a replacement home within three months after the beneficiary receives the proceeds or the SSI benefits will be terminated due to excess resources.

In summary, purchasing appropriate housing for people with disabilities can be a wonderful and lasting benefit. In each case, making a good decision requires careful consideration of several factors including who should own the house, how to finance the purchase, how the purchase may affect SSI benefits, whether other occupants should be charged rent, and how to select the right house. Consulting a special needs lawyer who understands special needs trusts, government entitlement programs, tax rules and real estate law is crucial when planning for the purchase and maintenance of a home for a special needs trust beneficiary.

About this Newsletter: We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.


"Reprinted with permission of the Special Needs Alliance – www.specialneedsalliance.org."

If you wish to establish a special needs trust or have any questions regarding special needs planning to insure that your disabled loved one is properly cared for and their public benefits are maintained after your death, please visit our website.