Special Needs Alliance Newsletter on Home Ownership

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May, 2011 - Vol 5, Issue 9

The Voice®, the Official Newsletter of SNA

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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:

a.. 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.

b.. 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.

c.. 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.

d.. 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.

e.. 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.

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Requirements for Reprinting this Article: The above

article may be reprinted only if it appears unmodified, including both the

author description above the title and the " About this Newsletter " paragraph

immediately following the article, accompanied by the following statement:

" Reprinted with permission of the Special Needs Alliance -

www.specialneedsalliance.org. "

© 2011 Special Needs Alliance. .

Ellen Garber Bronfeld

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