Suitable housing is a critical issue for many clients with disabilities. Frequently, the client’s disability requires modifications to their residence. However, if the individual is the beneficiary of a special needs trust (SNT) and trust funds might be used to pay for modifications or repairs to a home that the beneficiary doesn’t own, things can get complicated.
Dependent on the type of work to be done to the home and who else it will benefit, the work could violate the trust’s terms and jeopardize the SNT beneficiary’s receipt of government benefits like Medicaid and Supplemental Security Income (SSI). While nothing should be undertaken without guidance from your special needs planner, the following is a general outline of the risks and some possible solutions for trustees considering using trust assets for home modifications.
Home modifications that will be funded by a “third-party” SNT are less of a danger area. With this type of trust, the trust language controls what payments can be made, and there should be no effect on Medicaid or SSI as long as the trust’s terms are respected. This is not necessarily the case with “first-party” SNTs, which require that the trust’s funds be used for the “sole benefit” of the beneficiary.
Modifications that help only the beneficiary, that are inexpensive, and that add little value to the home likely won’t run afoul of the sole benefit rule. For example, adding a ramp or widening doorways and hallways to accommodate a wheelchair are for the beneficiary’s sole benefit, are relatively low cost, and might be easily paid for by the trust.
Some modifications are less clear-cut, such as modifications that may also benefit others, are more expensive, or add substantial value to a home. For example, the beneficiary’s doctor may recommend water therapy for the beneficiary. The trustee might pay to install a pool or a sauna, but the benefits of such modification may extend to the property owner by adding value to the home and other residents who might enjoy the pool or sauna. Large-scale repairs such as a new roof or improved water supply, modifications that will certainly benefit the beneficiary but will just as certainly profit the property owner and others living in the home, are even murkier for a trustee.
Modifications and repairs that appear to benefit non-beneficiaries are not automatically excluded because they confer a benefit on others or are expensive, but great care is required. In such cases, where possible and when there is a compelling benefit to the beneficiary, the trustee might pursue a co-ownership interest or life-estate in the home, or an occupancy agreement that requires the owners to provide housing to the beneficiary well into the future. In some cases, a trustee may make a loan with a secured interest for alterations rather than make a distribution.
If you or your loved one intend to make special needs modifications or repairs to a home from an SNT, you need to know exactly what changes you want to make and why they are necessary, and then meet with your special needs planner to figure out how you might achieve your goals while protecting the trust’s beneficiary.