A Rare Triumph for Recipients of Public Benefits:
A Federal Court of Appeals Protects Section 8 Beneficiaries
By Gregory Wilcox, CELA
Recipients of federal housing assistance had good reason to celebrate on June 14, 2016. On that day, United States Court of Appeals for the First Circuit issued a decision that protects the housing assistance of people who are forced to use trusts to maintain their eligibility for Supplemental Security Income (SSI) and Medicaid. Specifically, the court held that distributions of principal from first-party special needs trusts are not countable “income” that Public Housing Authorities can use to increase the rental obligation of recipients of Housing Choice Voucher Program assistance (commonly known as “Section 8”). The case, DeCambre v. Brookline Housing Authority, is the first appellate court opinion on the issue and a complete reversal of the earlier adverse decision of the Federal District Court judge.
Plaintiff Kimberly DeCambre had received a series of settlements for her personal injury claims in 2010. With the help of her attorney she promptly obtained an order from her Massachusetts state court creating a trust for her that would hold her settlement funds and thereby protect her existing Supplemental Security Income (SSI) benefits and Medicaid coverage that she received because of her disabilities. The trust was a typical Special Needs Trust (SNT) established for a disabled person under 42 USC §1396(d)(4)(A). As usual, it gave the trustee discretion to make or not make distributions to DeCambre, and it gave DeCambre, as beneficiary, no authority over the trust assets or distributions.
In 2013 plaintiff DeCambre applied to the Brookline Housing Authority (BHA) for continuation of her Section 8 housing assistance and disclosed the existence of the SNT she had created with her personal injury settlements. When BHA inquired about the trust distributions over the previous three years, it discovered that the SNT had made substantial distributions to DeCambre. It then determined that the distributions almost all counted as “income” for Section 8 purposes and that because her “income” was so high DeCambre was no longer even eligible to receive assistance from the Section 8 program.
The core of the problem that gave rise to the DeCambre case is that public benefit programs are not coordinated with one another, and so eligibility rules conflict – usually to the detriment of the beneficiary. For example, eligibility for the Section 8 program, unlike eligibility for SSI and Medicaid, depends solely on an applicant’s ability to demonstrate low income. The higher the income, the less the assistance -- with a cap on eligibility if income exceeds a certain level. However, there are exceptions. For example, if a Section 8 recipient receives a one-time lump sum “windfall” of some kind, such as an inheritance or damages from a personal injury award, the Section 8 program does not count it as “income” that has an impact on the amount of the recipient’s housing assistance.
However, such windfalls do have a potentially catastrophic effect on Section 8 recipients if they also receive support from either Social Security’s SSI income-grant program or from a state’s Medicaid program because of their disabilities. These programs do have asset tests, so if a person receives a windfall of any kind and simply keeps it, he or she will very soon lose both their sole source of income (or at least a significant part of it) and their medical coverage. To prevent this, such people typically avail themselves of special qualifying SNT’s that Congress designed to allow such windfalls to be sheltered for purposes of SSI and Medicaid in a limited number of circumstances (described in 42 USC §1396p(d)(4)(A)). If the recipient of the windfall transfers it to such a trust, the transfer is not counted as a disqualifying transfer and the windfall does not count as a disqualifying asset once it is in the trust. These trusts are called ‘first-party” trusts because they are funded by the trust beneficiary him or herself. Trusts funded by someone else are called “third-party” trusts and were not at issue in the DeCambre case.
Now, it should not come as a surprise that the recipients of housing assistance, SSI, and Medicaid are frequently the very same people. Accordingly, in a rational world these programs would be coordinated so that they do not conflict with one another. However, that is not the case. Until the DeCambre decision, the recipient of a personal injury award who transferred it to a first-party SNT that met SSI and Medicaid rules, would very likely find that trust distributions back to them from their trusts caused their Section 8 countable “income” to go up, and either cause their rent to escalate or to make them ineligible altogether. This is because HUD and the local Public Housing Authorities that administer Section 8 have long taken the position that any periodic distribution from a trust to a housing assistance beneficiary is countable “income,” even if all the distribution consists of is money that the recipient earlier put in him or herself.
In the DeCambre case the defendant BHA justified its position based on its readings of the HUD regulations that govern the administration of the Section 8 program. Among the other ironies, HUD and BHA apparently agree that if plaintiff DeCambre had taken her personal injury award, put it under her mattress, and then gradually removed small sums to spend, BHA would not count the small sums as countable “income.” Of course, this “mattress shelter” would not work at all to protect plaintiff DeCambre’s SSI and Medicaid, which she would have surely lost immediately. Moreover, under HUD rules, BHA would also “deem” her to be receiving a certain amount of additional income on the assets she had sequestered under her mattress, so her rent would still go up. It was damned if you do, and damned if you don’t.
The judge in DeCambre at the Federal District Court revealed that he had serious misgivings about the equity of the BHA’s position, but denied relief to plaintiff DeCambre on the basis of judicial deference to agency interpretations. The First Circuit Court of Appeals demonstrated no such reticence, and held foursquare for DeCambre.
The Court’s Rationale
Plaintiff’s main claim, and the only one the court ended up addressing, was that BHA had misapplied HUD regulations by including distributions from her first-party trust in her countable income. As a result, the court had to address HUD’s regulations, and BHA’s interpretation of them, rule by rule. It discussed and dismissed each one of BHA’s interpretations, ultimately holding that the regulations do not allow BHA to treat all distributions from DeCambre’s trust as countable income.
Much of the argument involved the definition of “Net Family Assets” in the HUD regulations, as follows (a portion of 24 CFR §5.603(b)):
In cases where a trust fund has been established and the trust is not revocable by, or under the control of, any member of the family or household, the value of the trust fund shall not be considered an asset so long as the fund continues to be held in trust. Any income distributed by the trust fund shall be counted when determining annual income . . . .
The court said there were three areas where the parties agreed about the interpretation of this language. First, it appeared to be agreed that because the funds held in such a trust are not “considered an asset,” they escape the rule that such assets must be generating countable “income,” which in turn impacts the amount of the housing assistance. Second (and much less obviously), the court said it was agreed that once the trust’s income was distributed, it must be counted in determining the Section 8 recipient’s countable “income.” Third, the court said that “the parties appear to agree” that the “main aim and effect” of the regulation was “to postpone the recognition of income derived from holdings in an irrevocable trust until the income is distributed out of the trust.”
This purported third area of agreement was a surprise. It is not at all clear that BHA would ever have agreed to such a statement. Indeed, making such an assumption seems to lead fairly inexorably to the court’s ultimate answer to what it then stated was the main issue in dispute: “what happens when the trust distributes to or for the benefit of the tenant some or all of the principal originally paid into the trust.” The court found that in plaintiff DeCambre’s case, her SNT principal had generated little or no actual income, so all distributions were distributions of principal.
The court then addressed what it called the “three reasons” that BHA gave for treating trust distributions of principal as countable “income” in plaintiff Decambre’s case. It looked at each in turn and found a sufficient number of reasons to dismiss each one of them.
BHA’s First Argument
The court said that BHA’s first argument was that the regulation should be read to mean that any “disbursement” from a trust is countable income. The court noted that this clearly isn’t true because BHA had already disregarded some disbursements from plaintiff DeCambre’s SNT because they fell under certain exemptions for medical expenditures. In addition, the court cited some internal HUD instructions confirming that not all SNT distributions should be counted as “income.”
Instead, harking back to its earlier comment about the agreed “main aim and effect” of the regulation, the court found that if the language is read instead to cover only income on the trust’s principal, it “serves a straightforward function.” The court said it ensures that the irrevocable trust income that would otherwise count immediately toward annual income eventually counts as income when it is disbursed.1 In other words, the trust only serves the purpose of providing a delay in the PHA’s ability to count income. The court did not address the question of whether such a delay in the DeCambre case was sufficiently significant to be a consideration. Essentially it decided that the delay had no legal significance by ignoring the issue.
Finally, and perhaps gilding the lily, the court also speculated that if disbursements of principal were intended to be counted, the rule would more likely have been placed in the section of the regulations that defined “income” rather than in the one that defined “family assets.” Well, maybe.
BHA’s Second Argument
The court noted, however, that there is another HUD regulation that had to be addressed: 5.609(a)(1), Annual Income:
Annual income means all amounts, monetary or not, which:
(1) Go to, or on behalf of, the family head or spouse (even if temporarily absent) or to any other family member; or
(2) [are anticipated to be received]; and
(3) Which (sic.) are not specifically excluded in paragraph (c) of this section;
It’s fairly obvious that the settlement amounts in DeCambre’s case did in fact “go to” her, so they would indeed be within the definition of “annual income.” However, Paragraph (c)(3) excludes “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 injury and property losses . . . [unless they are intended to replace earnings].”
So, the court stated, “the question remains”: did plaintiff’s trust principal, which would have qualified as an exempt “lump sum” receipt if it had been paid to her directly, retain or regain that exempt status despite having been “routed through her SNT”?
BHA seized upon the fact that the settlement proceeds were paid directly into plaintiff DeCambre’s trust, not to her directly, and therefore never became excluded lump sum additions to the family assets. Alternatively, it argued that the funds may have once been excluded lump sum receipts but lost their exclusion by being delivered to a trust. In other words, BHA thought that “routing the funds through the trust” (to use the court’s words) was sufficiently significant so that the “lump sum” exclusion was lost.
The court made short work of these arguments by relying on its earlier “delay purpose” interpretation of 5.603. It said:
It is hard to imagine, though, without expressly so stating HUD also intended, now to the tenant’s detriment, to count toward annual income certain funds that would not have counted toward annual income had they not been routed directly into an irrevocable trust, merely because the tenant who opted for an irrevocable trust received the benefit of these funds only after some delay.
By reminding us that the import of 5.603 is “only” to result in delay in counting of income, and by the magic of characterizing the “routing through an SNT” as “mere,” the court essentially decided the case based on its own notions of what seemed significant. In another example of conclusory “mereness,” the court later said that it could find “no reason” why HUD would want to exclude lump sum receipts that go directly to a beneficiary and not want to exclude them “merely” because they go to a tenant through a trust of which the tenant is a beneficiary. As some legal analysts have pointed out: when a court says that your client has “merely” taken some action, it is clear that your client is going to prevail.
BHA’s Third Argument
The court then moved on to BHA’s third argument. BHA maintained that “even if passage through an irrevocable trust does not have the potential to convert all assets into income upon disbursement, such passage at least has the potential to convert into income those sums that were originally excluded from annual income only because they fall into the lump sum exclusion.” The theory behind this argument was the policy rationale behind the “lump sum” exclusion. BHA argued that the lump sum exclusion was in the regulations to prevent one-time receipts from causing an artificial spike in countable income in a single year. BHA argued that this rationale did not apply if the lump-sum funds were routed through an SNT that then made small periodic (rather than lump sum) distributions.
The court quickly noted that for some reason BHA did not apply this same logic to funds deposited to a bank account (rather than an SNT) or “held under a mattress.” All such distributions would not normally be treated as countable income. However, the court noted that BHA had “doubled down” on its argument to avoid inconsistency by claiming that even distributions from a bank account should be treated as countable income. The court had little problem dismissing this “counterintuitive conclusion.” Instead, it found that HUD regulations “point in exactly the opposite direction,” citing HUD regulation 5.609(b)(3):
Any withdrawal of cash or assets from an investment will be included in income, except to the extent the withdrawal is reimbursement of cash or assets invested by the family. [emphasis provided by the court]
Finally, the court dismissed BHA’s final two arguments. First, BHA said that an internal HUD Advisory Letter supported its position. The court found that the Advisory Letter did not squarely address the issue at hand and also that it lacked the necessary “fair and considered judgment” to carry weight with the court. Second, BHA argued that the court should give deference to its reading of HUD regulations. The court avoided this argument by distinguishing between HUD and BHA. It found that “we have no basis for deferring to the BHA on how to read the applicable federal regulations.” BHA had no role in creating the regulations, and none of the usual reasons for deference to agency interpretations applied to BHA, the court said.
In the end, the court concluded that “BHA had improperly counted the distributions of principal of DeCambre’s settlement-funded irrevocable trust toward her annual income,” and reversed the District Court’s opinion.
Questions to ponder
Why doesn’t the logic of the decision of the court in DeCambre prevent the Social Security Administration’s SSI program from counting d4A trust distributions that are not “income” earned by funds in the trust, i.e., “merely” return of principal?
Why didn’t BHA charge deemed income for two years at the HUD passbook rate on the value of the money that DeCambre transferred to her d4A trust?
1 At this point in its analysis the court left Footnote 17 “acknowledging the assistance of amici National Academy of Elder Law Attorneys, Inc.; Special Needs Alliance, Inc.; and the National Housing Law Project for elaborating this reading of 5.603(b).” This acknowledgment was extremely satisfying to see. Their joint amicus brief had urged this very point, and the distinction between distributions of trust income and distributions of trust principal became central to the court’s entire decision.
(Greg Wilcox, Esq., is an attorney in private practice in Berkeley, CA)
Page Last Modified: April 3, 2017