The Listen to Lawrence Letter: What happens when I sell a home that is in an irrevocable trust?
February 23, 2022
Dear Clients and Friends,
I have answered today’s question several times in previous LISTEN TO LAWRENCE LETTERS. The fact that it keeps being asked shows there is some confusion out there so here we go again. This is for all of you who have a house in an irrevocable trust but may sell it someday and buy another.
CLIENT QUESTION:
I have a trust that was written in your office. It is an irrevocable trust with a supplemental needs trust written into it for my daughter who is the trustee.
At this time there is only property in the trust and no other assets. I am selling my home and moving from New York to Florida. I need the proceeds of that sale to pay for the home in Florida. I understand that my daughter needs to open up a trust bank account with a tax ID number to deposit the proceeds into it from the sale of my home in New York.
My questions are as follows:
1. Does my daughter write me a check to pay for the new home from this account?
2. If there is excess money from the sale of the New York home once the Florida home is paid for, would we need her consent to use it?
3. In the event my daughter needs Medicaid, will they be able to use any funds that are left in the trust, or does the Supplemental needs trust protect those funds?
4. Are there any tax liabilities as a result of these transactions?
5. How does the new home in Florida get put into this existing trust?
6. Is there a new five-year look back when we do this?
Thank you for your time and advice.
MY RESPONSE:
First, I don’t understand the need to move full-time to Florida. It’s muggy
most of the year and they have hurricanes. New York is the center of the universe! 😊 Alright, let’s move on.
One of the reasons we set up these irrevocable Medicaid Trusts to hold your house is the ease and continued protection if and when you sell your house someday. When the trustee sells the house, the trust gets the money, not you. The trustee will deposit the checks at the closing into a trust checking account with your trust Tax ID number (or your social security number if all Grantors are still living and we did not supply you with a trust Tax ID number). The trustee will use the money in the bank account to purchase the Florida property. The Florida property will be titled in the name of the trust. There is no new lookback because you did not add anything to the trust; all that happened is that trust assets changed from one asset to another. Remember, you will never need the money yourself to buy this new property, the trust will buy it for you.
The balance of any money in the trust after the new purchase remains in the trust and cannot be given to you or used for your benefit. If you can get it, Medicaid can get it. It can be used to pay for your daughter’s special needs, and it can be distributed to your other children who can do anything they want with it. If used for your daughter, it will remain protected from her need for needs-based government benefits.
As for tax consequences, you will retain your $250,000 per person ($500,000 per couple) capital gains exclusion so there is likely no tax consequence.
I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.
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As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.
Let’s stay connected.
Stay safe!
Until next time,
peace, health and happiness,
Lawrence Eric Davidow