Of Counsel
New federal regulations known as the Housing Opportunity Through Modernization Act (HOTMA) impact how distributions from special needs trusts (SNTs) affect the beneficiary’s eligibility for low-income housing subsidies. These include Section 8, Project Based, as well as other HUD housing programs. These new regulations highlight the need for trustees of special needs trusts to stay informed about what benefits the beneficiary of a special needs trust receives as well as all sources of income the beneficiary has. The new regulations deem distributions from an SNT to be income in certain circumstances. The trustee must determine what type of housing subsidy the beneficiary is receiving. The trustee must also determine which SNT distributions are treated as countable income under the new HOTMA regulations.
HOTMA regulations took effect on July 1, 2025. These new regulations are made more complicated, as individual Public Housing Authorities (PHAs) are responsible for enforcement of the new regulations. There is some inconsistency in the interpretation of these regulations, resulting in conflicting and inconsistent information given out by local PHAs. Under HOTMA, distributions for nonrecurring or sporadic income are not deemed income. Sporadic income is a distribution made less than once per year. HOTMA also specifically exempts distributions made from the principal of the SNT. All other distributions are deemed income of the beneficiary for HUD income purposes.
The basic change in the deeming rules is that distributions of trust income to the beneficiary count as household income and will affect the amount of rent subsidy the beneficiary receives. However, distributions from the principal of an SNT will not be deemed income. Some PHAs do not count distributions for health or medical expenses, regardless of age, while other PHAs exempt distributions for health or medical expenses only for minor children. This inconsistent application of what is or what is not treated as income is causing a great deal of confusion, making it unclear how to make distributions from an SNT to avoid an increase in the beneficiary’s rent or, worse, loss of eligibility.
One workaround may be to transfer trust income earned from interest or dividends in a year to an ABLE account. A HUD notice issued in 2019 indicates that distributions from an ABLE account are exempt and not included in a beneficiary’s income. However, advocates have found inconsistent treatment of distribution of income to an ABLE account by different PHAs. Some PHAs look at the source of the funds transferred to an ABLE account to see if the transfer source was from earned income or from principal of the trust. If the transfer to an ABLE account is from earned income, some PHAs are deeming even the distributions from an ABLE account to be income if they were made from a transfer made from income of the trust. The safest advice I can share at this point in time is to make all distributions from principal to avoid increasing the beneficiary’s rent responsibility or jeopardizing his or her eligibility.
When a beneficiary is receiving a housing subsidy, the trustee must develop a budget that considers eligibility for all government benefits he or she is receiving. The choice of what goods or services are paid by the trust from the trust’s income may increase the amount of rent due. An increase in rent may be acceptable in that the beneficiary of the trust is able to live a higher quality of life by paying a bit more in rent. The beneficiary must pay 30% of his or her income for rent, so a slight increase in rent may be warranted in some cases. However, increasing distributions from the trust to the point of exceeding income guidelines is seldom wise if there aren’t sufficient assets in the trust to make up for the potential loss of a housing subsidy. If there aren’t sufficient assets in the trust to make up for the loss of a housing subsidy, the loss of a housing subsidy should be avoided. Limiting distributions from the trust in order to preserve eligibility must be considered.
To summarize, if the beneficiary of an SNT receives a HUD housing subsidy, there is no consistent treatment of how distributions from an SNT will be treated. The trustee may want to communicate with the specific PHA to determine how it will treat income from an ABLE account prior to transferring income to the ABLE account. If the trustee is still unclear, then the trustee should make all distributions directly to vendors or to an ABLE account from trust principal and not from trust income.