Trustees as Homeowners Beware!
Personal trusts often own residential real estate. In the case of persons with disabilities, the trust format allows a trustee the discretion needed to maintain a home. Along with those powers comes great responsibility to ensure that the trust is serving the needs of its beneficiaries in the best way possible.
Home ownership creates great financial stress. Utilities, taxes, and insurance costs may seem paltry compared to replacing appliances, or a roof. Over time, the cash balance of a trust might dwindle, and the home will be too expensive to maintain. Keeping that caution in mind, the Trustee must be well informed about asset management, cash flow, and maintenance costs.
Trustees must weigh various factors, as well as short and long-term goals, when faced with circumstances involving trusts and families that have insufficient funds to meet a beneficiary’s needs or maintain a residence. First, the Trustee should know what income is available to the beneficiary and the family to meet expenses. This will involve determining whether the trust beneficiary is receiving Supplemental Security Income (“SSI”), a federal cash benefit. If so, the beneficiary has some income but any payment made by the trust for costs that are considered “shelter,” to the beneficiary, like the payment of gas and electricity bills, must be reported to the Social Security Administration (“SSA”) and will reduce the beneficiary’s monthly SSI benefit by up to a maximum of one-third (1/3) of the Federal Benefit Rate (FBR). Second, the Trustee and family must determine who is able to pay the other carrying costs for any residence owned by the trust, above and beyond the monthly utilities. This may occur through the payment of rent by any other family members residing in the home owned by the trust. Third, the Trustee must identify any additional costs incurred in meeting the beneficiary’s needs, other than maintaining a residence, including costs of transportation, caretaker services or equipment purchases.
The Trustee begins by estimating the expenses for the residence and the beneficiary’s needs, as well as identifying the available income and assets to meet these expenses. The Trustee of a trust with declining balances may have to select among impossible choices. For instance, do we repair an automobile or repair a broken window? Do we pay the heating bill when the family is unable to do so, and reduce the beneficiary’s SSI income that would have been available to purchase food for the month? If we pay for internet and cable, do we have funds left to purchase winter clothes? Because the stakes are so high when planning for a person with special needs, a dedicated Trustee often agonizes over these tough administration decisions. The anguish a Trustee may feel is compounded by the beneficiary’s distress if a wrong decision is made. We simply cannot ignore the extreme pressure imposed on a Trustee whose every decision may determine how long a special needs trust will last to serve the beneficiary’s needs.
Given the expenses of owning a residence and the high costs of care for a person with disabilities, I advise extreme caution before investing special needs trust assets in the purchase and maintenance of a residence for the beneficiary and/or family. Were there greater options available in finding suitable rental units for an individual with special needs, I would encourage many beneficiaries to rent handicap modified homes or apartments. Without sufficient housing options in the rental market, however, beneficiaries may demand the purchase of a home. And as most homes are not handicap accessible, the Trustee must have funds to make modifications. The downside of a Trustee diving into a real estate investment is the often inevitable financial crisis of depleting the trust’s cash to carry the residence over time and being forced to sell the home in favor of a less accessible rental arrangement.
The distress for both the Trustee and the beneficiary is palpable when faced with a trust having a steadily declining balance and, unfortunately, choices that satisfy everyone involved in the beneficiary’s care simply may not exist.
Evan J. Krame
