Beneficiaries Should Exercise Caution When Allocating Trust Funds

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Editor's Note: Under the current law, a parent, grandparent, legal guardian of the individual, or a court can establish a Special Needs Trust (SNT) for a disabled person.

On June 24, 2015, a US Senate Committee approved the Special Needs Trust Fairness Act, which would allow the disabled person to set up a SNT on their own, without the need to go to a court for permission. Special Needs Trusts allow persons with disabilities to supplement daily living expenses when government benefits alone are insufficient and protect them against the risk of impoverishment.

More information on the Special Needs Trust Fairness Act

In this article, we see how trustees and beneficiaries of Special Needs Trusts can become more aware of how to make reasonable distributions of trust funds:

When Kimberly used money from her Special Needs Trust to buy a car, pay phone and cable bills, and cover $6,000 in veterinary costs for her cats, she never imagined those payments would affect her right to low income housing.

But the Brookline, Massachusetts, housing authority decided to count the money paid from Kimberly's Special Needs Trust as income to her, and that disqualified her from her Section 8 housing.

Special Needs Trusts are created to comply with Medicaid and Internal Revenue Service (IRS) regulations so that disabled people can keep their health care coverage and still get some benefit from an inheritance, personal injury settlement or other asset source.

Kimberly was disabled by kidney disease, and when she won $330,000 in a personal injury settlement, the trial court in Massachusetts created a Special Needs Trust to hold the money.

After being disqualified for her housing because the trust paid money to a car dealer, Comcast and the Boston Cat Hospital, Kimberly filed a million-dollar complaint against the housing authority, claiming they shouldn't have taken away her Section 8 housing voucher.

A federal Judge in Boston reviewed her claims, sympathized over the "serious problem that beneficiaries of irrevocable trusts face," but decided not to issue an order against the housing authority.

He pointed out income from a Special Needs Trust "is treated differently" by the housing authority as compared to Medicaid. Medicaid will be reimbursed if there is anything left in the trust upon Kimberly's death. "Unlike Medicaid," the housing authority "is not reimbursed for benefits provided with excess trust corpus (principal) at the end of the beneficiary's lifetime." The housing regulations rule the outcome of the case.

The Judge read from a 2013 Housing and Urban Development (HUD) Handbook on low income occupancy requirements. The Handbook confirms that "settlement funds placed in irrevocable trusts are not assets." But the issue is income, and Kimberly's problem cropped up when the housing authority said the payments for her phone, car and cats counts as income.

The Judge found an HUD advisory letter that says "[d]istributions from the trust will be counted when determining annual income" unless there is an exclusion, and "[t]he ultimate determination of whether each of the above expenditures counts towards annual income or falls within an exclusion or deduction is to be made by the Public Housing Authority."

The Judge decided against trying to overrule the housing authority regulations. Instead, he urged the housing authority to take another look at the trust payments.

The housing authority had "found it unreasonable that Kimberly tried to exclude her vehicle, phone, and cat expenditures from income," even though they found that the telephone and vehicle expenses were "regular." There are income exclusions in the housing regulations that allow "temporary, nonrecurring or sporadic income" and "the cost of medical expenses."

The trust had made twelve phone/cable/internet payments, nine veterinary payments, four travel payments, and two car purchase payments. Could any of those payments be considered "temporary, nonrecurring or sporadic"?

"$480 and $675 were paid for her phone and internet bills in January 2013, $1,218.51 was paid in veterinary expenses to the Boston Cat Hospital in February 2013, and $3,875.12 was paid for airfare and hotel. Nearly $5,000 more was paid for veterinary care through the spring of 2013, and $775 was paid to Comcast for phone, cable, and internet in April 2013. An automobile purchase in the amount of $37,601 was paid for in May 2013."

Phone, Internet, Travel Expenses

Because of federal court decisions involving other government programs like Supplemental Security Income (SSI) and Medicaid, the Judge felt "compelled to point out that case law includes ‘television, Internet, [and] travel' expenses as something SNTs should cover." The HUD and IRS guidelines on deductible medical expenses do not discuss costs to maintain a telephone line. "This expense, however, seems to fall under the acceptable expenditures outlined by" the federal appeals court in Philadelphia, "and could be considered a non-extravagant spending under the same reasoning allowing spending on television and Internet."

Automobile

The Trust purchase of an expensive car was a big problem for Kimberly's low income housing eligibility. The Judge read from the HUD Occupancy Handbook chart of deductible medical expenses "which includes the cost of transportation, like bus fare or car mileage, to and from medical treatment, but does not list the cost of an actual vehicle." Also, an IRS list of medical deductions provided for the cost of transportation, like "actual fare for a taxi, bus, train, or ambulance," or, for "medical transportation by personal car, the amount of your actual out-of-pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking fees." So, the Judge said that Kimberly's "automobile purchase likely cannot fall under these medical expenses, which seem to be limited to public transportation and mileage costs, but the fact that title is held by her Trust as an asset should preclude it from being counted towards income."

Pets

The Judge said the issues raised by Kimberly's "cat veterinary expenses, totaling approximately $6,000" were "more difficult." Her attorneys explained that she "had some sick cats and . . . they became ill with cancer. . . . so there were a bunch of expenditures on these sick cats . . . . They were very expensive cats."

The HUD Occupancy Handbook covers the cost of "assistance animal and its upkeep" as a deductible medical expense, and HUD defines assistance animals as "animals that are used to assist, support, or provide service to persons with disabilities." This includes "providing emotional support to persons with disabilities who have a disability-related need for such support."

The judge noted this "established HUD and FHA guidance on support animals, covering the right to have a service animal within a dwelling and veterinary costs of an animal," and he said the housing authority "ought apply this guidance to determine whether [Kimberly's] cats could be categorized as emotional support animals, allowing their veterinary costs to be counted towards deductible medical expenses in annual income calculation. No such analysis was provided as to veterinary costs in the written decision, and should be provided on remand."

Be Aware

The judge asked the housing authority to "perform a more thorough determination of each potentially excludable expense" and to "provide clear guidance and instruction for potential tenants with regard to their financial planning and spending."

Kimberly's case proves that trust beneficiaries must become aware that Medicaid and the IRS are not the only government agencies that can pass judgment on their Special Needs Trusts.

Read the full case here.

Find more information on Special Needs Trust Planning here.

John L. Roberts, J.D., is an Elder Law Attorney serving clients in Hampden County, MA. After practicing for 15 years, he confronted the challenges of family caregiving when his own father developed dementia. The experience transformed his practice, enabling him to help clients who are family caregivers from a place of true understanding.

Visit Law Office of John L. Roberts

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2 Comments

I had more sympathy before I reading that she had apparently gone through about $200k of her trust in 2 years while living on the public dime. $50k is itemized in the suit, but with full medical & rent at under $400/month, she's still spending another $5k/month on....???
My nephew has a SNT but he is not allowed to touch it. I'm the trustee. Its only 50k. He is not allowed to use it for food or lodging. This was an interesting article.