Special Needs Trust- Determination of Annual Income

person A.J. Johnson today 02/01/2020

Managers of affordable housing properties (e.g., Section 8 or LIHTC) must consider whether a household has assets that may contribute to the income of the household. Common assets include cash-on-hand, bank accounts, and retirement accounts. A less common type of asset is a "trust." A trust is a legal arrangement generally regulated by state law in which one party (the creator or grantor) transfers property to a second party (the trustee) who holds the property for the benefit of one or more third parties (the beneficiaries). A trust can contain cash or other liquid assets or real or personal property that could be turned into cash. Generally, the assets are invested for the benefit of the beneficiaries.

Trusts may be revocable or nonrevocable. A revocable trust is a trust that the grantor of the trust may amend or end (revoke). When there is a revocable trust, the grantor has access to the funds in the trust account. When the grantor sets up a nonrevocable trust, the grantor has no access to the funds in the account.

The beneficiary frequently will be unable to touch any of the trust funds until a specified date or event (e.g., the beneficiary’s 21st birthday or the death of the grantor). In some instances, the beneficiary may receive the regular investment income from the trust but is unable to withdraw any of the principal.

How to Treat Trusts

The decision on how to handle a trust depends on who has access to either the principal in the account or the income from the account. If any member of the tenant family has the right to withdraw funds from the account, the trust is considered to be an asset and is treated as any other asset. If no family member has access to either the principal or income of the trust at the current time (or within the upcoming 12-months of the certification year), the trust is not included in the calculation of income from assets or in actual income. If only the income (and none of the principal) from the trust is currently available to a family member, the income is counted in annual income, but the trust is not included in the calculation of income from assets.

Special Needs Trusts

A special needs trust (SNT) is a trust that may be created under most state laws, often by family members for disabled persons who are not able to make financial decisions for themselves. Generally, the assets within the trust are not accessible to the beneficiary.

  1. If the beneficiary does not have access to income from the trust, then it is not counted as part of the income.
  2. If income from the trust is paid to the beneficiary regularly, those payments are counted as income.

This is the extent of the guidance from HUD regarding Special Needs Trusts in Handbook 4350.3. Unfortunately, the guidance creates more questions than it answers, such as:

  1. What is considered "income from the trust?" Technically, income from the trust would be income generated "by" the trust, such as interest or dividends. Payment of principal from the trust to the beneficiary would be a "distribution," but may not be actual income from the trust.
  2. If distributions from the trust are counted as income, what if the principal in the trust was put into the trust by the household and was already counted as income for the household?
    1. Example: A special needs trust is established by a family for a disabled child. The family funds the trust with income earned from employment, which is counted as income when earned. Years later, the family member who created the trust dies and the trustee begins using the funds in the trust to cover expenses of the disabled child. If these distributions are counted as income, the income would essentially have been counted twice.

Recommendations When Dealing with a Special Needs Trust

Based on available HUD guidance, we do know with some degree of confidence how to handle disbursements from Special Needs Trusts in certain circumstances:

  1. Direct distributions from a SNT may be excluded from annual income if the payment/income is "temporary, nonrecurring or sporadic." [See 24 CFR 5.609(e)(9).
  2. Amounts specifically excluded by any other Federal statute from consideration as income for purposes of determining eligibility or benefits under a category of assistance programs that includes assistance under any program to which the exclusions set forth in 24 CFR 5.609(e) apply.

Whether the income distributed by Trustees to or for the benefit of a beneficiary is or will be counted as annual income depends upon the nature of the expenditure or distribution and the frequency. Depending on the purpose and/or manner of payment a distribution may or may not rise to the definition of "income" subject to inclusion in an annual income determination.

We do know that based on HUD’s clear definition of income in both regulation and the HUD 4350.3, income includes amounts which "go to, or on behalf of (emphasis added) the family head or spouse (even if temporarily absent) or to any other family member." This appears to clearly indicate that money paid on behalf of a household (not just directly to a household) may be counted as income.

Based on all available guidance regarding the treatment of disbursements from Special Needs Trusts, I make the following recommendations:

  1. If the money that is placed into a SNT would be excluded when originally received (e.g., a lump sum settlement), it should not be counted when disbursed from the SNT. (This recommendation is supported by a court’s decision in Decambre v. Brookline Housing Authority, et. al., June 2016).
  2. If the money in a SNT came from the household in which the trust beneficiary lives and would have counted as income when originally received, distributions of principal should not count until the full amount contributed to the SNT has been paid out. This recommendation is also supported by the court decision in the Decambre case cited above and 24 CFR §5.609(b)(3).
  3. If the income generated by the SNT (i.e., interest or dividends) is paid to the beneficiary and is not specifically excluded by federal regulation (e.g., direct reimbursement of medical expenses), it should be counted as income for the household.
  4. If principal from the SNT is disbursed to the beneficiary, it should be counted as income unless:
    1. The funds were contributed to the SNT by the household in which the beneficiary lives and either
      1. Would have been counted as income when received by the household, such as wages, or
      1. Would have been excluded from income if received directly by the household (e.g., lump sum payments).
  5. Finally, for properties with Low-Income Housing Tax Credits, when in doubt as to whether or not to count income distributed from a SNT, consult the Housing Finance Agency responsible for monitoring the tax credit property for compliance with IRS regulations.

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RD to Implement HOTMA Income and Certification Rules on July 1, 2025

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HUD’s Proposed Rule to Eliminate Affirmative Fair Housing Marketing Plans: A Critical Analysis

Introduction The Department of Housing and Urban Development (HUD) has proposed eliminating the requirement for Affirmative Fair Housing Marketing Plans (AFHMPs), a cornerstone of fair housing enforcement for decades. This proposed rule, published on June 3, 2025, represents a significant departure from established fair housing practices and raises serious concerns about the federal government s commitment to ensuring equal housing opportunities for all Americans. HUD s justification for this elimination rests on six primary arguments, each of which fails to withstand careful scrutiny and analysis. Background on Affirmative Fair Housing Marketing Plans AFHMPs have long served as essential tools in combating housing discrimination by requiring property owners and managers to actively market housing opportunities to groups that are least likely to apply. These plans ensure that information about available housing reaches all segments of the community, not just those who traditionally have had better access to housing information networks. Analysis of HUD s Justifications 1. Claims of Inconsistency with Fair Housing Act Authority HUD argues that its authority under the Fair Housing Act and Executive Order 11063 is limited to the "prevention of discrimination, claiming that AFHM regulations go beyond this scope by requiring outreach to minority communities through targeted publications and outlets. The agency characterizes this as impermissible "racial sorting. This argument fundamentally misunderstands both the nature of discrimination and the historical context of fair housing enforcement. Information disparities have long been one of the most prevalent and effective forms of housing discrimination. When certain groups systematically lack access to information about housing opportunities, the discriminatory effect is equivalent to being explicitly excluded. The failure to provide equal access to housing information is, in itself, a discriminatory act, not merely a neutral information gap. AFHMPs address this reality by ensuring that housing information reaches all communities, particularly those that have been historically excluded from traditional marketing channels. 2. Constitutional Challenges Under Equal Protection HUD contends that AFHM regulations violate the Equal Protection Clause by requiring applicants to favor some racial groups over others. This characterization is both inaccurate and misleading. AFHMPs do not create preferences or favor any particular group. Instead, they ensure equitable access to information by targeting outreach to communities that are "least likely to apply for specific housing opportunities. This principle applies regardless of the racial or ethnic composition of those communities. For instance, housing developments located in predominantly minority neighborhoods are required to conduct affirmative marketing in white communities since white residents would be least likely to apply for housing in those areas. The regulation is race-neutral in its application it focuses on reaching underrepresented groups regardless of their racial identity. This approach promotes inclusion rather than exclusion and advances the constitutional principle of equal protection under the law. 3. Delegation of Legislative Power Concerns HUD s third argument that the Fair Housing Act s authorization of AFHM regulations constitutes an unconstitutional delegation of legislative power represents perhaps the weakest aspect of their legal reasoning. Congress explicitly mandated that affirmative efforts be made to eliminate housing discrimination. As the administrative agency responsible for implementing congressional intent in this area, HUD possesses both the authority and the responsibility to determine the most effective means of carrying out this mandate. The development of specific regulatory mechanisms to achieve Congress s stated goals falls squarely within HUD s legitimate administrative authority and represents appropriate implementation of legislative intent rather than overreach. 4. The "Color Blind Policy Justification HUD frames its opposition to AFHMPs as part of a "color-blind policy approach, arguing that it is "immoral to treat racial groups differently and that the agency should not engage in "racial sorting. This argument mischaracterizes the function and operation of AFHMPs. These plans do not sort individuals by race or treat different racial groups unequally. Rather, they ensure that all groups have equal access to housing information by specifically reaching out to those who are least likely to receive such information through conventional marketing channels. Critically, AFHMPs require marketing to the general community in addition to targeted outreach. This comprehensive approach ensures broad access to housing information while addressing historical information disparities that have contributed to ongoing patterns of segregation. 5. Burden Reduction for Property Owners HUD argues that "innocent private actors should not bear the economic burden of preparing marketing plans unless they have actively engaged in discrimination. This position suggests that property owners should be exempt from fair housing obligations unless they can prove intentional discriminatory conduct. This reasoning effectively provides cover for property owners who prefer that certain groups remain unaware of housing opportunities. The "burden of creating inclusive marketing strategies is minimal compared to the societal cost of perpetuating information disparities that maintain segregated housing patterns. The characterization of comprehensive marketing as an undue burden ignores the fundamental principle that equal housing opportunity requires proactive effort, not merely passive non-discrimination. This represents a retreat to a "wink and nod approach to fair housing enforcement that falls far short of the Fair Housing Act s aspirational goals. 6. Prevention vs. Equal Outcomes HUD s final argument contends that AFHM regulations improperly focus on equalizing statistical outcomes rather than preventing discrimination. This argument creates a false dichotomy between prevention and opportunity creation. AFHMPs exist not to guarantee equal outcomes but to ensure equal opportunity by providing equal access to housing information. When information about housing opportunities is not equally available to all segments of the community, the opportunity for fair housing choice is compromised from the outset. True prevention of discrimination requires addressing the structural barriers that limit housing choices, including information disparities. The Broader Implications HUD s proposed elimination of AFHMP requirements represents a concerning retreat from decades of progress in fair housing enforcement. The proposal effectively returns to an era when discrimination, while technically prohibited, was facilitated through information control and selective marketing practices. The reality of housing markets is that access to information varies significantly across communities. Property owners and managers possess considerable discretion in how they market available units. Without regulatory requirements for inclusive outreach, there are few incentives to ensure that information reaches all potential applicants. Anyone with experience in affordable housing development and management understands that information flow can be deliberately targeted and shaped. This targeting can either expand housing opportunities for underserved communities or systematically exclude them. Marketing strategies can be designed to minimize applications from certain groups while maintaining technical compliance with non-discrimination requirements. Conclusion The six justifications offered by HUD for eliminating AFHMP requirements fail to provide compelling reasons for abandoning this critical fair housing tool. The arguments reflect a fundamental misunderstanding of how housing discrimination operates in practice and ignore the crucial role that information access plays in maintaining or dismantling segregated housing patterns. Rather than advancing fair housing goals, the proposed rule exacerbates existing disparities by removing a key mechanism for ensuring that all communities have equal access to housing information. The elimination of AFHMPs would represent a significant step backward in the ongoing effort to achieve the Fair Housing Act s vision of integrated communities and equal housing opportunities for all Americans. The current proposal suggests an agency leadership more committed to reducing the regulatory burden on property owners than to expanding housing opportunities for underserved communities. This represents a troubling departure from HUD s mission and responsibilities under federal fair housing law. Moving forward, policymakers, housing advocates, and community leaders must carefully consider whether this proposed rule serves the public interest or merely provides cover for practices that perpetuate housing segregation through more subtle but equally effective means.

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