Settlement Funds Placed in Irrevocable Trusts Aren’t Assets

Facts: A disabled Section 8 resident is the beneficiary of an irrevocable Special Needs Trust. The resident has no control over the trust, and the trust itself earns little or no interest. The trust was funded entirely from a series of lump-sum settlements from a personal injury and property damage lawsuit, and was created by a court for the resident in 2010. The total amount of the settlement was estimated to be $330,000.

Based on an expenses chart submitted by the resident, principal from the trust has been used to pay for administrative trustee fees; cell phone, cable, and Internet bills; veterinary care for cats; dental and medical costs; and travel expenses.

The resident has been a participant in the Section 8 housing assistance program since 2005, and effective Dec. 1, 2012, her monthly rental payment was $312. The fair market or contract rent totaled $1,595 per month, and she received $1,283 in housing assistance program payments.

While conducting its annual recertification in the fall of 2013, the PHA determined that the resident was no longer eligible to receive housing assistance because her income was too high. The resident self-reported her gross annual income to be $12,398, including Social Security and food stamps, for 2013. But based on the resident’s income tax returns, the PHA found that the resident received approximately $200,000 in distributions from the trust between 2011 and 2013, and that her 2011 income tax return reported an income of $108,322. Further, the PHA found that the trust disbursements totaled $31,749.01 in 2012 and $62,828.99 between January and November 2013, which it determined should have been reported as income for purposes of recertification.

The PHA’s yearly gross household income limit for a two-person household is $22,600. As a result, the resident was notified she would be responsible for the full amount of her contract rent and would no longer be eligible for housing assistance.

The resident appealed the letter and requested a reasonable accommodation to exclude the expenditure of trust money that was used for her car purchase, phone bills, and veterinary care for her cats. She argued that these were medical expenses and thus exempt from income calculations. The hearing officer at the informal hearing determined that the PHA correctly calculated her income and rental share. And he decided that although the resident’s personal injury settlement isn’t considered income under HUD regulations, when these assets are placed in an irrevocable trust, the distributions from the trust must then be “considered income unless specifically excluded by regulation.”

The resident then sued the PHA for discrimination and asked the court to order the PHA from counting her trust disbursements toward the calculation of her total tenant rent.

Ruling: A Massachusetts district court upheld the PHA’s decision.

Reasoning: The court found that the HUD Handbook confirmed that settlement funds placed in irrevocable trusts are not assets. Assets placed in irrevocable trusts are considered as assets disposed of for less than fair market value except when the assets placed in trust were received through settlements or judgments. Thus, the court was unable to find any regulatory support for the resident’s argument that her trust expenditures must be excluded from annual income and that her trust corpus remained a lump-sum settlement. To the extent the PHA treated the resident’s expenditures as spending from an irrevocable trust, rather than from a personal settlement fund, the court found that their determination was a reasonable one.

The court in its decision also noted that this case demonstrated the serious problem that beneficiaries of irrevocable trusts face, in particular those that seek to pour lump-sum settlement funds into irrevocable trusts. But until the rules and regulations are clarified, it noted that PHAs should provide clear guidance and instruction for potential tenants with regard to their financial planning and spending.

• Decambre v. Brookline Housing Authority, March 2015