Question: My mother has a Medicaid Asset Protection Trust and her house has been owned by this trust for 6 years. She purchased the house in 1980 for $30,000. It's now worth $400,000. What will be the tax consequences if she sells the house while she is alive? What if we sell it after her death?
Answer: First, let me say that an attorney should review the trust. Not all trusts are the same and the answer to your question depends upon what terms are contained in the trust document. Also, it is always a good idea to have estate planning documents reviewed every five years. There may have been changes in the law or Medicaid regulations that would require some tweaking to your mother’s plan.
That being said, there are certain provisions that are usually included in aw trust created for the purposes of protecting assets in the event the creator of the trust needs to apply for Medicaid to help pay for the cost of long term care. Many of these types of trusts include provisions that make it a “grantor trust” for income and estate tax purposes. This means that your mother can continue to reside in the premises and pay all the maintenance and carrying charges, including but not limited to homeowner’s insurance, utilities and real estate taxes. As a result, she would still be entitled to the Veteran’s and Star exemptions that she would otherwise be entitled to if the property were in her sole name. The trust could provide that all the income earned in the trust would be payable to her. Alternatively, the trust could also allow the income to remain in the trust or be paid to her children or others. Income would only be earned by the trust if the real property collected rents or there were other income producing assets like, but not limited to, stocks, bonds or bank accounts.
Assuming your mom’s trust qualifies as a grantor trust, she is entitled to receive a $250,000 capital gains exemption if the property is sold during her lifetime, just as if it was in her sole name. Each person can receive this exemption from capital gains taxes upon the sale of a property that has been their primary residence for two of the five years immediately prior to sale. This means that if she has $370,000 worth of gain in the value of the property from time of purchase to time of sale, she will only pay taxes based on $120,000 of that gain because of her exemption.
Grantor trusts also have the benefit of providing a “step-up” in cost basis upon the death of the creator of the trust. Therefore, upon your mother’s death, the cost basis to determine the capital gain will be equivalent to the value of the property as determined on the date of her death. For example, if the property is worth $400,000 on the date of her death and you sell it for $420,000, the capital gain is $20,000, rather than the difference between her purchase price of $30,000 and the sale price.
Your mother and her trustee should consult with her Elder Law attorney to review the trust and be sure that the trust meets all your mother’s requirements and that her estate plan remains in line with her goals.
-- Nancy Burner, Esq. and Britt Burner, Esq.