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

written by Special Needs Alliance member
Martha C. Brown, at the St. Louis, Missouri law
firm of
Martha C. Brown & Associates, LLC.
Reprinted with permission of the Special Needs Alliance -
www.specialneedsalliance.org.

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.


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
. http://www.elderlawstlouis.com/index.shtml


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