HUD Regulations Effective January 1, 2024, Exclude Special Needs Trusts Proceeds from Income for Purposes of Low-Income Housing

HUD Regulations Effective January 1, 2024, Exclude Special Needs Trusts Proceeds from Income for the Purposes of Low-Income Housing

The Housing Opportunity through Modernization Act (HOTMA) became law in January 2016. However, final regulations to implement certain sections of the law are now going into effect. The final rule to implement Sections 102, 103, and 104 of HOTMA took effect on January 1, 2024. One aspect of this final rule is that it excludes payments from the principal of irrevocable trusts, including special needs trusts, from an individual’s income to calculate their eligibility for low-income housing.

As children with special needs become adults, some can live independently from their families. These individuals often have fixed or limited income in the form of Social Security Disability benefits, SSI benefits, or some employment income. In some cases, their families may also have provided additional financial support through a special needs trust. The biggest benefit of a special needs trust is that the funds, when used for allowable purposes, are exempt or not countable as assets for most public benefits programs. Therefore, individuals with special needs can access special needs trusts without jeopardizing their eligibility for public benefits. Adults with special needs often rely heavily on these public benefits programs, which may comprise a major source of their financial support.

When adults with special needs can live independently, subsidized housing through U.S. Department of Housing and Urban Development (HUD) programs is often available as a low-cost option. The amount of rent individuals pay to live in subsidized housing varies based on the type of program involved. Still, it is generally based on an individual’s monthly household income from all sources.

One portion of the final rule implementing HOTMA that recently went into effect established new income exclusions from the eligibility calculation for federally subsidized housing programs. Among these exclusions are various sources of income that might affect adults with special needs, such as non-monetary in-kind donations from food banks or similar organizations, gifts from holidays or birthdays, and distributions of principal from irrevocable trusts, including special needs trusts. Therefore, when calculating the rent adults with special needs may owe while living in subsidized housing, any principal distributions they have received from a special needs trust should not count toward their monthly household income.

However, the distribution of any income earned by the special needs trust, such as interest earned on the invested funds, does count as income in terms of eligibility for low-income housing. HOTMA does NOT exclude the distribution of income from special needs trusts from the household income calculation – it only excludes the distribution of principal from the trust.

The difficulty arises in how public housing agencies (PHAs), which routinely administer subsidized housing programs in different localities, will be able to distinguish between income and principal distributions from special needs trusts. Most PHA staff members are unlikely to be familiar with special needs trusts, and it may be challenging to discern between income distributions and principal from a special needs trust.

Furthermore, neither HOTMA nor its final regulations contain a set definition for “income.” Therefore, determining what constitutes income from a special needs trust remains unclear and wholly subjective.

Likewise, trustees and trust beneficiaries are in no better position to accurately distinguish between principal and income. As a result, these individuals are likely to find it difficult to provide documentation of the distinction if the PHA requests it.

The bottom line is that in its quest to streamline household income calculation in low-income housing situations, HUD may have inadvertently created a more challenging situation for all parties involved. While the blanket exclusion of principal distributions from special needs trusts in this context can be helpful to adults with special needs living in federally subsidized housing, it remains to be seen how difficult this exclusion will be to implement in any meaningful way.

Call Rubin Law For Help With Special Needs Trusts 

Rubin Law is the only Illinois law firm to dedicate itself exclusively to providing compassionate legal services for children and adults with special needs. We offer unique legal and future planning techniques to meet your family’s individual needs.

Call us today at 866-TO-RUBIN or email us at to learn more about the services we can offer you and your family.