By Thomas D. Begley, Jr., CELA
(Article originally published in the Barrister) Section 8 of the Federal Housing Act of 1937 provides a rental assistance program for low-income families and individuals. HUD pays rental subsidies so eligible families can afford decent, safe and sanitary housing. The programs are generally administered by Public Housing Agencies (PHAs). Generally, the family pays 30% of its adjusted monthly income for rent. Household income must be within the applicable limit established by HUD. The limits are based on family size and locality. Family members must be U.S. citizens or eligible aliens. There are income limits. Income includes Social Security and Disability benefits, pensions, annuities, alimony, some welfare payments and regular contributions from others. Lump sum acquisitions such as personal injury settlements, are not counted as income. If the personal injury plaintiff receives a settlement and puts the money under the mattress and spends it over time, the expenditures do not count as income and do not affect Section 8 eligibility. Historically, distributions from trusts, including Special Needs Trusts, have been counted as income, unless they are used for medical purposes or are irregular and sporadic.
In an important decision for Section 8 Housing Voucher recipients, the United State District Court for the 1st Circuit reversed the District Court decision in an important public housing case.(1) In the lower court case,(2) the District Court held that Kimberly DeCambre was receiving distributions from an irrevocable Special Needs Trust funded with the proceeds of a personal injury settlement and disqualified DeCambre from her housing assistance on the grounds that she was no longer income eligible. The Housing Authority held that because the distributions from the Special Needs Trust should be counted as income, the amount of the subsidy provided under Section 8 should be reduced $0 . Over a three year period, the distributions from the trust exceeded $200.000. The Housing Authority and the District Court held the entire amount of the distributions were income and, therefore, DeCambre lost her eligibility for Section 8 assistance. The court stated that if Kimberly DeCambre had put the money under her mattress and spent it over time, there would have been no affect on her Section 8 eligibility. However, the court held that once the personal injury settlement was deposited into the trust, it somehow changed its charac ter and all distributions from the trust were considered distributions of income. These distributions, when added to DeCambre’s other income, reduced her subsidy to $0.
On appeal, an amicus brief was filed by the Special Needs Alliance, the National Academy of Elder Law Attorneys and the National Housing Law Project in support of DeCambre. The Appellate Court noted that lump sum additions to family assets, such as settlement for person or property losses are specifically excluded under HUD Regulations from annual income. DeCambre argued that because all of the funds in her Special Needs Trust derive from a series of lump sum settlement payments for a personal injury. the Housing Authority was required to exclude all of her distributions from her annual income. The lower court agreed up to this point stating that if DeCambre had simply put the money under her mattress and used it in the same manner that the trust had made distributions, there would be no problem because there is no asset test under Section 8. However, the District Court reasoned that by depositing the lump sum payments into the Special Needs Trust, the character of the distributions changed so that each distribution was 100% countable as income.
On appeal the amicus brief contended that the principal deposited into the Special Needs Trust should considered principal and only the income earned by investing the principal should be considered income. The Court of Appeals held that DeCambre’s Special Needs Trust was funded exclusively with the proceeds from a series of tort settlements. Had these settlement proceeds been paid directly to DeCambre, the parties agreed that they would have been treated as a lump sum addition to family assets and, therefore, would have been categorically excluded from annual income upon receipt under HUD’s Regulations. The parties agreed that income derived from investments should be considered income. The only issue was when the trust distributes to or for the benefit of the tenant, some or all of principal originally paid into the trust, how should that distribution be characterized. The Housing Authority maintains that even if DeCambre’s settlement proceeds bad the character of a lump-sum addition to family assets when they entered the Special Needs Trust, they no longer possess that character once they were disbursed from the Special Needs Trust. The Court of Appeals concluded that distributions of principal from the Special Needs Trust remain principal and only the investment income is considered income. The question not before the court was, what is the implication for Third-Party Special Needs Trusts? Should distributions of principal not be considered income, but be considered simply a distribution of principal as with a First-Party Special Needs Trust? The issue was not argued in DeCambre, but logically it would seem that the same result should obtain.
As a matter of procedure in both First-Party and Third-Party Trusts, the Housing Authority should look at the resident’s prior years’ federal and/or state income tax return.
Whether or not the DeCambre decision will be accepted by other PHAs in other districts remains to be seen. The decision may be of limited effect. Section 8 is being amended to provide an asset test of $100, 000.
- DeCambre v. Brookline Housing Authority, Case 15-1458, Document 00117013731 (June 14, 2016 ).
- Brookline Housing Auth. 95 F. Supp. 3d (D. Mass. 2015).