The Listen to Lawrence Letter: Will the 5 year lookback be affected if we sell the house?
November 9, 2021
Dear Clients and Friends:
When you make the decision to create an Irrevocable Medicaid Trust you may not be aware of how changes made to the assets being held in that trust could affect the protection benefits. Maybe you thought that you’d never sell your house so you didn’t ask about it. Or, maybe it was all too overwhelming at the time and you don’t remember what was discussed. That’s why I want you to ask me your questions BEFORE you do anything. So I thank this next reader for asking a question that many of you need to know the answer to!
Over five years ago you put our house in an irrevocable trust. We are now looking at the possibility of buying a condo or renting. Our questions for you are: If we sell our house and buy a condo, does the condo automatically replace the house in the trust? What happens if the condo is cheaper than the selling price of the house? If we rent, I assume money from the sale of the house will continue in the trust. Will any of this change the 5-year look-back period?
Clearly, the most popular asset to transfer into an irrevocable Medicaid trust is the family home. So, what happens when you are ready to sell the home? First, you must realize that you do not own the home in these circumstances. The trust owns the home and it is the trustee of the trust that has to sign all the paperwork (sales contract and all the papers at the closing), subject to your consent to the sale. At the closing, the trustee will walk out with one or more checks representing the proceeds of the sale, made out to the trust. The trustee will then go to a bank and open up a new bank account in the name of the trust. None of the money goes back to you…all the money stays in the trust. Thereafter, the trustee can buy another property (house, condo, co-op….doesn’t matter which), in the name of the trust. It may be at this point that the trust owns a condo and some money because the condo costs less than the house.
Understand, that no money ever left the trust. All the trustee has done is convert one asset in the trust for another….or others. Since nothing ever left the trust, and nothing was really added to the trust, then the look-back does not come into play. We would have the same result if the next year, the trustee sold the condo and bought mutual funds. Again, nothing came out of the trust and nothing new was added. All that happened is we changed the TYPE of asset inside the trust. This does not restart the look-back clock. The resulting condo and cash inside the trust will remain safe as your five-year look back has expired.
And this is one of the many reasons why these trusts are so flexible and popular.
Keep in mind, however, if the trust sells the house and does not purchase another property, then all of the money will be safe inside the trust, but will not be available to help you pay the rent on a newly leased property. Remember, if you can get the money, Medicaid can get the money.
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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Until next time…
peace, health and happiness,
Lawrence Eric Davidow