The Listen to Lawrence Letter: What happens if the trust sells the house and buys a new one that costs more?

November 9, 2021
Dear Clients and Friends:
I get a lot of questions from clients who put their home in an irrevocable Medicaid trust and then want to sell it, like the one that follows:
My trust was funded with my house. No other assets. What would happen if the trust sold the house and purchased a new property but the new property costs more than the old property? Can I add more money to the trust to make the purchase?
STOP!  Do not do this without talking to me first. Adding money to the trust to buy a more expensive house is simply adding more money to the trust. You know what that means. It means another 5-year look-back issue for the trust. If you are perfectly healthy and willing to risk another 5-year look-back then go ahead and do it. But my usual advice is not to do this, especially if the look-back from the transfer of the old house to the trust is over or near over. Once an asset is protected, or almost protected, leave it alone. In the past this was not a problem because I could always partially revoke the trust and remove the second transfer, eliminating the second 5-year look back. This corrective action can no longer be done.
Solution? Loan the money to the trust. The trust will sign a note, promising to pay you back when you sell your old house in the trust. The note should be in writing and carry a legitimate interest rate, like 5%. A loan is not a gift, so no look back issues here. Solved.
Having given you a solution, I would prefer if the new home was equal to or less than the first home.
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.
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Stay safe!
Until next time…
peace, health and happiness,
Lawrence Eric Davidow