Asset Protection Planning for the Home – part 2

August 9, 2010
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Transfer of Home to an Irrevocable Trust

Placing your Home into the trust will be subject to the same sixty month look-back period for purposes of Medicaid eligibility.

Will I have to pay gift taxes?

The transfer of the residence is not a taxable gift because the transfer is deemed to be an incomplete gift; however, Federal gift tax returns must be filed.

Can I sell the Home?

If the Home is sold during your life, the sale proceeds would be held by the Trust with no effect on Medicaid eligibility after the expiration of the transfer penalty period.

The transfer should not adversely affect your ability to maximize your exclusion of $250,000 on the gain from the sale.

Will I lose my real estate tax exemptions?

Depending upon the Trust language, the transfer may affect your eligibility for a real estate veteran’s exemption or senior citizens real estate tax reduction, if applicable. However, the use of a life estate deed in conjunction with this Trust will minimize this possibility.

What happens in the future?

Upon your demise, the fair market value of the residence will be included in your estate for Federal and New York State estate tax purposes. Estate tax returns may be required and taxes may be owed. The children would be able to sell the Home from the Trust or transfer it to themselves as the Trust’s beneficiaries. The residence would not be subject to a probate proceeding.

Which Asset Protection strategy is better?

What are the advantages of an Irrevocable Trust versus a Retained Life Estate:

A. The transfer with a retained life estate will result in a shorter Medicaid transfer penalty period than a transfer to a Trust. (advantage—life estate)

B. The transfer to a Trust is an incomplete gift for gift tax purposes, unlike a transfer with a retained life estate. (possible advantage—trust)

C. In either option, the residence will still be considered part of your estate subject to estate taxation and will receive a step up in basis for income tax purposes if the residence is sold subsequent to your demise. (no advantage).

D. If the residence is sold while you are in a nursing home, then the sale proceeds would NOT be an available resource for purposes of Medicaid eligibility, if held in the Trust. A portion of the net sale proceeds would be available with a retained life estate. (advantage—trust)

E. If the residence is sold in the Trust, you may qualify for the $250,000 exclusion of capital gain. There is currently no regulations or case law on point. With a retained unrestricted life estate, a portion of the sale proceeds may qualify for the $250,000 exclusion as long as the other requirements of the Internal Revenue Code are met. (advantage-trust)

F. There is asset protection in the Trust from creditor claims of the children, unlike the retained life estate. (advantage—trust)

G. The period of Medicaid ineligibility for nursing home care may be greater for a Trust than a life estate transfer depending upon the value of the gift. (possible advantage—life estate)

H. Legal fees are typically less for a deed transfer with a life estate than a trust. (advantage—life estate)

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