This issue of The Voice is written by Martha C. Brown, CELA, a Special Needs Alliance member in St. Louis, Missouri. Martha 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 for the last six years in Kansas City Magazine. Through her numerous community presentations and continuing legal education presentations, Martha helps attorneys and the public understand and address legal issues concerning the elderly and people with disabilities. Currently Martha is participating in the state wide task force to rewrite the guardianship code in Missouri.
Clients frequently ask special needs planning attorneys whether a special needs trust should own a house. Unfortunately, there is no simple answer to this question. It is a decision the trustee must make after reviewing many factors. In May 2011, The Voice featured an article entitled “Buying a House for a Special Needs Beneficiary: Proceed with Care.” This edition continues that topic, addressing important issues to help families and trustees make a well-informed decision.
Should the House be Owned by the Trust Beneficiary or the Trust?
Sometimes the beneficiary of a special needs trust would like the trustee to purchase a house. If the trustee agrees that a house is an appropriate purchase for the beneficiary, the next decision is whether the trust or the trust beneficiary should be the owner of the house. This is not a decision to be made lightly. If the trust beneficiary owns the home, then the home generally will not be subject to the Medicaid payback provision required in a first-party special needs trust (which is the type of special needs trust that contains assets originally owned by the Medicaid recipient).
Even if the home is owned by the Medicaid recipient individually, the house may nevertheless be subject to Medicaid estate recovery and/or a Medicaid lien upon the death of the beneficiary. The Medicaid program allows states to place a lien against property owned by a Medicaid recipient for benefits received after age 55 for long-term care in a nursing home or hospital. Some states have the option to recover for other Medicaid services as well.
If the trust that will own the home is a third-party special needs trust, however, and therefore contains only assets that were owned by someone other than the Medicaid recipient or his or her spouse, there is no requirement that the trust reimburse the Medicaid program when the trust beneficiary dies. For this reason, with a third-party special needs trust it may be better for the trust to own a house rather than the beneficiary.
Still, there are other issues to consider in making a decision about whether the beneficiary should individually own the house or if a special needs trust should own it. If the trust beneficiary has impaired judgment, he or she may not be an appropriate person to own a home. Impaired judgment may make the beneficiary susceptible to financial exploitation by mortgage brokers, real estate agents, home repair vendors, caregivers and other family members or acquaintances. Some trust beneficiaries may be vulnerable to scams involving inappropriate first and second mortgages. Also, a trust beneficiary may be convinced to add another person as an owner of the real property, or in the worst case scenario, actually deed the house to another person.
There are other disadvantages, too, when the trust beneficiary owns the house rather than the special needs trust. When a person with a disability owns the home he or she lives in, the home is not counted as a resource in determining eligibility for SSI and Medicaid. However, if the person sells the house and does not purchase another, many government benefit programs, including SSI and Medicaid, will count the sale proceeds as a resource. To avoid being over the resource limit for such means-tested programs, the beneficiary would need to contribute the sales proceeds to a first-party special needs trust.
Additionally, sometimes the trust beneficiary is not physically, mentally or emotionally able to manage the problems that occur with home ownership. The need for home repairs may be overlooked, as well as notices of special assessments, real estate taxes, and homeowner insurance premiums. Inaction by the homeowner can have devastating results. These are issues that must be addressed in determining whether the special needs trust or the trust beneficiary should own the home.
If the trustee decides that the beneficiary will enjoy the pride of home ownership, but is concerned about possible exploitation, steps can be taken to protect the trust beneficiary. For example, the trustee could loan the beneficiary the money to purchase a home, and secure the loan with a mortgage on the home. The loan proceeds will not be counted as a resource for government benefit programs because the beneficiary will immediately invest them in a home, which is not counted as a resource. The mortgage debt owed to the trust will reduce the equity of the beneficiary’s home that could be subject to exploitation. If the beneficiary later sells the home, the balance of the loan to the trust will be repaid.
Use of Life Estates
Rather than purchase a home for the trust beneficiary, the trustee of a special needs trust may want to explore the possibility of purchasing a life estate interest in a family member’s home. A life estate is a type of property ownership that permits a person to purchase the right to live in a home during his or her lifetime. The right to live in the home ends at the purchaser’s death. So, for example, if Susan lives with her sister in her sister’s home, the trustee of Susan’s special needs trust could explore whether it would be advisable to purchase a life estate interest in her sister’s home. The purchase price would be a percentage of the value of the home, based upon Susan’s age. At Susan’s death, the life estate would automatically end and the sister would again have full ownership of the home.
Most State Medicaid agencies and the SSI program have a table to value life estates in order to calculate the purchase price. Some states even place a Medicaid lien against a life estate interest in a home when the Medicaid recipient dies. Before purchasing a life estate interest in a home for the beneficiary, the Trustee of a special needs trust should review the applicable state Medicaid rules on Medicaid liens to determine whether a lien would be placed on a life estate interest.
Capital Gains Taxation if the Trustee Sells the Home
The sale of a home can result in a capital gains tax on the sales proceeds if the home has appreciated in value since its purchase. When a trust owns the home, the capital gains tax rules are very different depending upon whether the trust is a first-party or a third-party special needs trust.
As a general rule, no capital gains tax is paid on the sale of a house that is owned by a single person who has resided in the home for two out of the last five years if the profit on the sale of the home is $250,000.00 or less. The capital gains exclusion for the residence owned by a married couple is $500,000.00.
If the home is owned by a first-party special needs trust, the trust beneficiary will be able to use the exclusion from capital gains as long as the beneficiary meets the residency requirement. If the home is owned by a third-party special needs trust, however, there is no exclusion from taxation for the appreciation in value of the home.
Can a Special Needs Trust Own a Home as a Section 8 Landlord?
Section 8 is a housing program administered by the United Department of Housing and Urban Development (HUD). The Section 8 program provides a rental subsidy to private landlords. When a person rents a Section 8 house or apartment, the tenant pays 30% of his or her monthly income towards the rent and the housing authority pays the balance of the authorized rent. Housing authorities vary in whether they will allow a home owned by a special needs trust to qualify for a Section 8 subsidy. The regulations for the Section 8 program state that no family member of the tenant (including a parent, grandparent, child, grandchild, sister or brother) can be the owner of a residence that is seeking a Section 8 subsidy. However, there is no prohibition in the regulations for housing owned by a special needs trust.
Conclusion
The issues discussed above remind all of us that the purchase of a home for the trust beneficiary of a special needs trust is a complicated decision that requires much deliberate thought and consultation with appropriate experts. The attorneys with the Special Needs Alliance have the expertise, practicality and sensitivity to assist people with disabilities and trustees of their special needs trusts in making these difficult choices.
About this Article: We hope you find this article informative, but it is not legal advice. You should consult your own attorney, who can review your specific situation and account for variations in state law and local practices. Laws and regulations are constantly changing, so the longer it has been since an article was written, the greater the likelihood that the article might be out of date. SNA members focus on this complex, evolving area of law. To locate a member in your state, visit Find an Attorney.
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