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By Gregory Wilcox, Esq.

It has long been a frustrating nuisance that the “Section 8” housing subsidy rules do not treat trusts and trust distributions in the same way that the Medi-Cal and SSI programs treat them. As disability planning attorneys all know, Medi-Cal and SSI will not count trusts as available, and trust distributions as countable income, unless the trust pays for basic needs, i.e., food, shelter, and medical care. Trusts that don’t make such distributions are exempt “special needs” trusts and are therefore a major tool for SSI and Medi-Cal planning.

Unfortunately, it doesn’t work that way for recipients of Section 8 housing support. Section 8 provides housing assistance to low-income people, including seniors and persons with disabilities, by subsidizing the rent they pay to private landlords. The subsidy pays private landlords a sufficient amount so that the tenant pays no more than 30% of his or her income towards the Fair Market Rent (as determined by the program). The federal Housing and Urban Development (HUD) funds the subsidies that make up the difference. Public Housing Authorities (PHA’s) formed by local governmental jurisdictions administer the program.

Section 8 eligibility rules relate only to the beneficiary’s income – the more the income, the less the subsidy. So, strictly speaking, a Section 8 beneficiary does not have to meet any general limitation on the amount and type of assets he or she owns. On the other hand, the Section 8 rules count almost any kind of receipt as “income,” including distributions from a trust, no matter what they are spent on or to whom they are paid. This is true whether it’s a first party trust created by the beneficiary or the third party trust created by someone else, and whether the trust includes special needs limitations or not. Any additional receipts that the PHA counts as “income” lower the amount of the housing subsidy. Indeed, Section 8 rules only except from countable income receipts that are temporary, nonrecurring, or sporadic.

As a result, it is quite a challenge for planners to construct a special needs trust that will work for Section 8 recipients. How does a trustee administer a special needs trust in any sensible way and still comply with the Section 8 rule that the distributions have be temporary, nonrecurring, or sporadic? Some commentators have suggested – only half jokingly – that trustees of such trusts flip a coin to decide whether to make a distribution; then they can argue that the distributions have been random and “sporadic.” But now there’s a new case that seems to offer a way out of this silly situation.

The Finley Case: The Facts

First of all, Sheila Finley vs. The City of Santa Monica is only a trial court case (May 25, 2011, Superior Court for the County of Los Angeles, BS 127077). However, it is a carefully and thoroughly reasoned trial court case. More importantly, it was not appealed and appears to be having a significant impact on PHA’s in other counties.

In April 2008, Sheila Finley (Finley) settled both a personal injury action and a workers compensation claim. She was at the time receiving both Supplemental Security Income (SSI) and Medi-Cal. Accordingly, the court ordered that the proceeds of both actions be placed into a first party special needs trust (SNT) to protect her benefits. In August of the same year Finley started to receive Section 8 housing assistance from the Santa Monica Housing Authority (SMHA). In March of the next year, 2009, the trustee of the court-created SNT received part of the settlement funds. Finley then reported to SMHA that she had funded her settlement proceeds of $47,800 into the SNT and gave SMHA a copy of her SNT. During the following six months the trustee of the SNT distributed $3,886 to a variety of third parties for Finley’s benefit, including payments to an insurance company (for policy premiums), a cable television provider, an oil company, an auto mechanic, and a hairdresser. The trustee also paid himself trustee fees as provided in the SNT.

SMHA discovered these trust distributions during its annual examination of Finley’s eligibility and sent her a notice in December 2009 that her rental payment obligation would be substantially increased. Indeed, her Total Tenant Payment (TPP) went up $101 per month to $358. $14 of the increase was a result of an increase in the overall Fair Market Rent for her unit, but $87 of the increase reflected her increased “income” arising from all the trust distributions. SMHA told Finley that “any amount distributed to the family member in the form of periodic payments from a trust counted as income.” This was entirely consistent with many other Section 8 decisions, and it was immediately upheld in a subsequent administrative hearing. However, in this case the Section 8 beneficiary sued – and then won!

The Finley Case: The Law

Finley filed a complaint in the Los Angeles Superior Court on June 30, 2010. It sought an injunction against SMHA prohibiting it from using the lump sum payment to her SNT as countable income thereby causing her to be charged a higher percentage of the TTP. In May 2011 the trial court issued a decision agreeing with Finley. It issued a Writ of Mandate ordering SMHA to reverse its decision and henceforth to calculate all future rents for all Section 8 recipients in accordance with its decision. Neither the City of Santa Monica nor SMHA appealed the decision, and in November 2011, the City filed its certificate of compliance with the court’s Writ of Mandate.

The logic of the court’s decision goes like this:

    Finley’s income includes all receipts, monetary or not, that are paid to her or on her behalf, unless expressly excluded under 22 CFR §5.609(c). 22 CFR §5.609(a)(3).

    Finley’s settlement funds themselves were, in fact, excluded as income under §5.609(c)(3).

    Distributions of principal (which meets the broad definition of “income”) from the Finley SNT must also be “counted when determining annual income under §5.609.” §5.603(b)(2). This had previously ended the argument, but in this case the court went further.

    §5.603(b)(2) only requires that such distributions be “counted” as “income” subject to the income counting provisions of §5.609(c). However, those provisions expressly excluded Finley’s SNT distributions because they were “lump sum additions to family assets, such as inheritances, insurance payments (including payments under health and accident insurance and worker’s compensation), capital gains, and settlement for personal and property losses.” In other words, the court found that the SNT distributions did in fact have to be “counted” as part of Finley’s income but also found that they then had to be “excluded” after they were counted.

Finally, any interest earned on principal would indeed be countable income – if the principal were a “family asset.” However, the assets held in an irrevocable SNT are not a “family asset” so none of the interest earned that is retained in the SNT is countable income. It only becomes countable income when actually distributed from the SNT.

The Aftermath

In April 2012 HUD suddenly took an interest in the case when the issue of Finley’s attorney’s fees came before the court (it had not been a defendant in the original action). HUD belatedly announced that it opposed the court’s interpretation of its regulations. It was too late. The court awarded Finley’s attorneys more than $122,000 in fees.

Personal Post script: To my surprise, a client of mine from Sonoma County brought me a one page form that had been sent to her by her local PHA. It said, “A recent California Superior Court Decision, Finley vs. City of Santa Monica, interprets HUD regulations to exclude distributions of principal from a special needs trust from the calculation of annual income for a housing program participant.” The form then asks for information about what amounts of principal and interest have been distributed from the beneficiary’s special needs trust over the last 12 months.

So it looks like Sonoma County’s PHA, and maybe others, will stop counting SNT distributions of principal from now on, whether or not the distributions are “temporary, nonrecurring, or sporadic.” Let’s hope it’s contagious. If so, it will be a big breakthrough in SNT planning, and trustees can stop flipping coins or rolling dice before they make distributions.

1. When the housing assistance program of the US Department of Housing and Urban Development subsidizing private rentals was first established in 1975, everyone called it “Section 8” after the location of its statutory provision. In the revised federal housing law enacted in 1998, Congress gave the program its formal name, “Housing Choice Voucher Program” (HCVP). Because few have heard of the latter, but almost everyone is familiar with the former, this article uses the term “Section 8” to refer to the HCVP.
2. Readers can find a discussion of the Section 8 program’s treatment of assets held in a special needs trust and its treatment of the funding of such trusts by the trust beneficiary in Wilcox, Special Needs Trust vs. Section 8, “Legal Network News,” Volume 18, No. 4, Winter, 2007, at page 1, also reproduced on CANHR’s website at
3. Countable income includes “the full amount of periodic amounts received from Social Security, annuities, insurance policies, retirement funds, pensions, disability benefits, and other similar types of periodic receipts.” 24 CFR §5.609(b)(4). Excluded from countable income are “temporary, nonrecurring, or sporadic income (including gifts).” 24 CFR §5.609(c)(9)
4. Wilcox, op cit., at page 7 (coins), and Urbatsch, Kevin, Administering the California Special Needs Trust, 2011, iUniverse, at page 163 (dice).
5. Pursuant to the court’s authority to establish a special needs trust for a disabled claimant under Probate Code §§3600, et seq., and 42 USC §1396p(d)(4)(a).
6. A similar decision is described in Wilcox; see endnote 2, above.
7. Zimring, Stuart, HUD Policy and SNTs: Bringing Finley vs. Santa Monica to Your State, Special Needs Trust Conference, 2012, Stetson University College of Law.

(Gregory Wilcox, Esq., is an attorney in private practice in Berkeley, CA