Irrevocable trusts and Medicaid planning

Medicaid planning requires careful thought.

Medicaid planning requires careful thought. (Credit: iStock)

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My dad is trying to decide whether to put the deed of his house into an irrevocable trust or transfer it to me, keeping a life estate. What are the pros and cons of each option? If he later wants to sell the house and buy a smaller one, could he do that in either scenario and claim the $250,000 tax exclusion for sale of a primary residence?

 

If there's any chance the house will be sold during your father's lifetime, an irrevocable trust is the better choice.


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Both strategies ensure you'll inherit the house, even if he needs Medicaid nursing home benefits: Medicaid can't put a lien on the house and recoup those benefits from its sale after his death if the deed is in your name or in an irrevocable trust.

If he gives you the deed but retains a life estate, he's still responsible for home maintenance costs and property taxes. If the deed's in a trust, the trust pays those expenses. Your father keeps his senior citizen property tax status and has lifetime occupancy rights in both scenarios. And in both, you inherit the house at its market value when he dies.

But if it's sold in his lifetime and you're on the deed, the proceeds are split between you, says Lawrence Davidow, an Islandia elder-law attorney. Your dad gets a relatively small share reflecting the actuarial value of his life estate. His share qualifies for primary residence tax exclusion, but isn't protected from Medicaid. Your share is taxable because the house isn't your primary residence. If the house is in a well-crafted trust, however, your dad still owns it for tax purposes -- so the entire proceeds qualify for primary residence tax exclusion and go into the trust, which buys him a smaller house.

The bottom line Medicaid planning requires careful thought.

Websites with more information nwsdy.li/longtermcare and nwsdy.li/nursinghomerates


TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747-4226, or email act2@newsday.com. Include your name, address and phone number. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own advisers for your specific needs.

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