In Decambre v. Brookline Housing Authority, a Federal Appeals Court found that distributions from a first-party Special Needs Trust do not automatically constitute income for calculating rent for Section 8 housing vouchers.

It has been well-settled that lump-sum settlement proceeds paid to an individual do not count as “income” for determining eligibility for individuals receiving HUD housing vouchers (i.e., federal rent subsidies for low-income individuals).  In this instance, Kimberly (a disabled individual) was receiving distributions from a Special Needs Trust funded with the proceeds from a series of legal settlements. Upon learning of this, the Brookline Housing Authority (“BHA”) determined that Kimberly was “over-income” for continued participation in Section 8 housing program that BHA administered at the local level and reduced her monthly Section 8 subside to zero.  Kimberly appealed BHA’s determination alleging the distributions from the Special Needs Trust should not count as income for Section 8 benefits for the reason the trust distributions should have been categorically excluded from income under HUD regulations as settlement proceeds, or, alternatively, on the grounds that certain specific distributions should have been excluded under the regulations as payments offsetting “the cost of medical expenses” or as “temporary, nonrecurring or sporadic income”.

In general, HUD provides housing assistance funding to state and local public housing authorities, which in turn administer the Program at the local level by making rent subsidy payments to landlords on behalf of participating tenants. The amount of a tenant’s monthly subsidy depends on her income. The Housing Act provides that a participating tenant’s subsidy is generally equal to her total monthly rent obligation minus 30% of the monthly adjusted income of the tenant’s family. A Special Needs Trust is a type of trust disabled persons under 65 may use to hold funds that allows the their eligibility for certain Social Security and state health benefits to remain unaffected by the funds held in trust. The Trustee, and not the beneficiary, controls distributions from the trust.

Kimberly’s Special Needs Trust was funded exclusively with the proceeds from a series of tort settlements. Had those settlement proceeds been paid directly to her, the parties agreed that they would have been treated as “lump-sum addition to family assets”, and therefore would have been categorically excluded from annual income upon receipt under HUD regulations.  Instead, Kimberly agreed to have the proceeds paid directly to a Special Needs Trust established under 42 U.S.C. 1396p(d)(4)(A) out of which those same funds were later disbursed as trust principal for her benefit at the discretion of the trustee. Kimberly maintained that this disbursed principal retained the character and classification that it would have had (as a lump-sum addition to family assets, not counted toward annual income) had it first been paid to her, rather than having first been routed through the special needs trust. District Court agreed with Kimberly stating “Absent more guidance to the contrary, we can discern no reason to exclude from annual income (as the regulations clearly do) lump-sum personal injury settlement proceeds paid directly to a tenant…yet not exclude those same processed merely because they go to or behalf of a tenant…through a trust of which the tenant is a beneficiary.”

If you have any questions surrounding the determination of this case and its effect on special needs trusts, feel free to get in touch with an attorney here at Bivens & Associates. We specialize in special needs trust law here in the state of Arizona.