Important Ownership Considerations: Real Estate & Special Needs Trusts
By: Connor W. Kavanaugh ChSNC, CTFA
Date: August 28th, 2020
It is safe to say that good quality housing options for individuals with disabilities are difficult to find and a challenge while planning. As you can imagine, housing is one of the most important planning topics and a common concern for families that should be discussed as a part of every comprehensive life care plan. Whether the vision for housing includes continuing to live in the family home with appropriate supports or moving out into independent housing, it is important to think through all aspects of this decision—a few of which we will cover today. Many parents anticipate leaving funds behind when they die that would allow their son or daughter with a disability to own or possibly purchase a condo or home to best fit their needs at that time. Whatever the vision might include, determining whether it makes sense for the home or condo to be owned by a special needs trust is likely at the center of the plan. As we will discuss further, individuals and families must also consider the pros and cons of owning a home versus renting or paying room & board in a supported living environment to determine the best fit.
Who Should Own the Home?
In many instances a special needs trust owning a home is a common arrangement but there are numerous important considerations that should be discussed in detail to determine the correct setup. When we begin to consider a special needs trust owning real estate, we want to first identify the type of trust that would own the property. It is important to identify the difference between a 1st party and 3rd party special needs trust. A first party special needs trust is funded with the individual assets and after the death of the beneficiary, first party trusts require reimbursement to the state in which the individual lived in for reimbursement of Medicaid services that were provided over their lifetime . In addition, it is common for first party special needs trust do not allow for housing distributions which would impact the ability for the trust to pay for some of the ongoing expenses and needs of home ownership. A third party special needs trust, which is funded with someone else’s assets such as an inheritance from a parent or proceeds from a life insurance policy, is more flexible on what it can pay for and does not require a Medicaid payback to the state.
Many individuals with disabilities may need to support to manage home ownership. If adult has an appointed guardian or conservator, the appointed guardian or conservator would, in most cases, have legal authority to manage the property on behalf of the individual. The same is true if an individual as an appointed a power of attorney. They could also receive support from that appointed individual to assist with some of the ongoing requirements of home ownership. In many instances, direct ownership isn't practical because of some of the ongoing duties as well as the concerns and uncertainty of possibility undue influence. The ability to leave a family home to a 3rd party special needs trust or buying a home with trust assets protects the home and property from creditors and leaves the financial and ongoing maintenance issues in the hands of the appointed trustee. It is important to note, that while a home purchase by 1st party special needs trust has many of these advantages during the individuals lifetime, the home would be subject to Medicaid recovery by the state upon the trust beneficiaries death-- this is a very important component.
Another important consideration when looking at who owns the property would be to determine who else might live in the home. If the home is owned 100% by a 1st party special needs trust, there may be complications if other family members reside there. Distributions from a 1st party special needs trust are supposed to be for the primary benefit of the beneficiary and this may be interpreted differently by various needs-based benefits agencies. Depending on the level of care giving duties performed by family members, they may be required to pay rent in order to avoid affecting the individual's eligibility for government benefits.
Let’s Talk Numbers
Like many decisions when planning long-term for an individual with disabilities, it is important to look at the dollars and cents and analyze the financial feasibility of the decision. Anytime the purchase or transfer of ownership of a residence is to be considered, it is critical to prepare a detailed budget which takes into consideration the cost of modifications needed for accessibility, long term maintenance, utilities, taxes, insurance and general upkeep. A common mistake in planning is to create a special needs trust to own property, only to realize years down the road that the ongoing costs consume a large part of the available funds and payment of other support needs are compromised.
Often, the solution may be as simple as finding a roommate to assist in offsetting the costs or being realistic about affordable purchase price. We're seeing a trend today for families to consolidate resources and purchase housing that provides for more than one individual. While there are many great examples of these types of arrangements, there are also many situations in which such plans don't work and in many instances, trustees aren't willing or unable to deal with the complexities that come along with this arrangement. Choosing the right trustee is an important decision!
Beyond the numbers, individuals with disabilities and their families should consider the pros and cons of home ownership including the future vision for the individual and where they may be best suited to live, the appropriateness of the home for future family configurations and the potential for aging in place. The location of the home is also an important factor—walk-ability to entertainment, restaurants, groceries and more allow the individual to be more engaged in community, a purchase consideration we recommend being high on the list.
Impact and Effect on Government Benefits
The impact of needs-based benefits should be at the top of the list when considering home ownership. Ownership of property and the payment of housing expenses can impact government benefits that the individual may be receiving including Supplemental Security Income (SSI) and Medicaid. It is important to note, for individuals who receive SSI, mortgage payments, property taxes, utilities and other costs related to housing paid on their behalf by a special needs trust are considered in kind support and maintenance (ISM) and will reduce SSI. Though the maximum reduction is only 1/3 of the individuals monthly SSI benefit, it is important to hire an experienced planning team to think through these issues. One of the common ways to minimize the impact of ISM is to better understand ABLE accounts and explore utilizing this account as the conduit to paying for housing related expenses. ABLE accounts allow for a contribution from a special needs trust.
While the home is an exempt asset for SSI and Medicaid benefits, the sale of the home in the future, if titled to the individual directly, will result in converting an exempt resource (a home) into a countable resource (cash) and possibly jeopardizing needs-based benefits. If the home is titled to the special needs trust, then the sale of the home would have no impact on eligibility.
It is important to note that a home in which the individual lives in is not a countable resource for needs-based benefits purposes. But, if the individual where to own the home outright and move to another housing option, that home in the following month now becomes a countable resource.
Where Do You Go From Here?!
Housing is always a challenge in future planning for individuals with disabilities not only because of the lack of supply, but also because of the complexities that go along when planning around such a valuable asset. Setting up a support system within a stable living environment is a high priority but the considerations are complex and families in their planning team are becoming increasingly creative as they struggle with the housing shortage. Our advice? Start with the vision for the future, begin to proactively plan by utilizing a special needs trust and an ABLE account and hire an experienced team of planning professionals around you to plan for the future. Good luck!