Protecting the Family Home–Transfer to Children and Retain Life Estate vs. Irrevocable Trust

By Scott Koldin

This entry was posted on January 22, 2014

When taking steps to protect the family home, there are important Medicaid asset preservation and tax planning considerations.

Tax planning considerations include preserving the $250,000 individual exemption ($500,000 for husband and wife) on the capital gains from the sale of the home and preserving the stepped-up basis date of death value of the home for the remainder beneficiaries.

This blog reviews the advantages and disadvantages of 1.) transferring the family home to children while reserving a life estate, or 2.) transferring the family home to an Irrevocable Trust.

Transfer the Home to Children and Reserve a Life Estate

  • Your children would receive a stepped-up basis date of death value of the home if they sell the home after your death.
  • A gift tax return may need to be filed depending on the value of the home.
  • It is possible that a portion of the $250,000 family home exemption ($500,000 for husband and wife) can be preserved based on the value of the life estate.
  • You would still receive certain tax exemptions such as STAR and Veterans.
  • A life estate prevents your children from being able to sell your residence until your death unless you sign the deed (Note: Your Power of Attorney might be able to sign the deed on your behalf).
  • Once the five year look back period has elapsed, your property would not be counted for Medicaid eligibility purposes.
  • If a Medicaid recipient owns a life estate to real property, the net income earned by the property (rent), will have to be paid to the nursing home.
  • If the property, including the life estate is sold, the life estate portion of the proceeds of sale might need to be applied towards the cost of care.
  • When you transfer your home to your children or other family members this option legally transfers ownership to your children. They now own the house and if problems arise in your children's lives, the house becomes subject to their problems, such as death, divorce or creditors. Also, if you later want to sell your house, your children do not have to agree to sell. If you later have a dispute with your children, they do not have to return ownership of the house to you and you cannot disinherit them from this ownership.

Transfer the Home to an Irrevocable Trust Prepared by Koldin Law Center, P.C.

There are many ways to prepare an Irrevocable Trust and the terms of the Trust can be different depending on your circumstances and how your attorney writes his/her Trusts. Therefore, the information provided below is based on a typical Irrevocable Trust prepared by the Koldin Law Center, P.C.:

  • Your children would receive a stepped-up basis date of death value of the home if they sell the home after your death.
  • You would still qualify for the $250,000 family home tax exemption on capital gains ($500,000 for husband and wife) when your home is sold.
  • The transfer to the Trust is not considered to be a gift for gift tax purposes.
  • You would still receive certain tax exemptions such as STAR and Veterans.
  • Once the five year look back period has elapsed, your property would not be counted for Medicaid eligibility purposes.
  • If a life use is reserved in the deed transferring the property to the Trust, this would prevent the Trustees from being able to sell your residence while you are still residing in the residence unless you sign the deed (Note: Your Power of Attorney might be able to sign the deed on your behalf).
  • You retain the right to change the beneficiaries of the Trust. Therefore, if circumstances change in your children's lives or in your relationship with your children, you retain ultimate control over who inherits your home.
  • For more information about Irrevocable Trusts, please see our website.