Should You Put Your House In A Trust?

Should You Put Your House In A Trust?

When you say the word “trust” many people think that trusts are only used by the uber rich to protect their millions of dollars but that is very far from the truth.  Yes, extremely wealthy families do use trusts to reduce the size of their estate but there are also a lot of very good reasons why it makes sense for an average individual or family to establish a trust.   The two main reasons being the avoidance of probate and to protect assets from a long-term care event.  This article will walk you through: 

• How trusts work

• The difference between a Revocable Trust and an Irrevocable Trust

• The benefits of putting your house in a trust

• How to establish a trust

• What are the tax considerations

What Is A Trust?

When you establish a trust, you are basically creating a fictitious person that is going to own your assets.   Depending on the type of trust that you establish, the trust may even have it's own social security number that is called a “tax ID number”.  Here is an example.  Mark and Sarah Williams, like most married couples, own their primary residence in joint name.  They decide to establish the “Williams Family Trust”.  Once the trust is established, they change the name on the deed of their house from Mark and Sarah to the Williams Family Trust. 

Revocable Trust vs. Irrevocable Trust

Before I get into the benefits of establishing a trust for your house, you first have to understand the difference between a “Revocable Trust” and an “Irrevocable Trust”.   As the name suggests, a revocable trust, you can revoke at any time.  In other words, you as the owner, can take that asset back. You never really “give it away”.   Revocable trusts do not have a separate tax identification number.  They are established in the social security number of the owner.  A revocable trust is sometime referred to as a “living trust”.

With an Irrevocable Trust, once you have transferred the ownership of the house to the trust, it’s irrevocable, meaning you are never supposed to be able to take it back. The trust will own that house for the rest of your life.  Now that sounds super restrictive but there are a lot of strategies that estate attorneys use to ease those restrictions and I will cover some of those strategies later on in this article.

In both cases, in trust language, the owner that gave property to the trust is called the “grantor”.  I just want you to be familiar with that term when it is used throughout this article.

So why would someone use an Irrevocable Trust instead of a Revocable Trust?  The answer is, it depends on which benefits you are trying to access by placing your house in a trust.

The Benefits Of A Revocable Trust Owning Your House

People transfer the ownership of their house to a revocable trust for the following reasons: 

• Avoid probate

• They have children under the age of 25

• They want maximum flexibility

Avoid Probate

From our experience, this is the number one reason why people put their house in a revocable trust. Trust assets avoid probate.  If you have ever had a family member pass away and you were the executor of their estate, you know how much of a headache the probate process is.  Not to mention costly.

Let’s go back to our example with Mark & Sarah Williams.  They own their house joint and they have a will that lists their two children as 50/50 beneficiaries on all of their assets.

When the first spouse passes away, there is no issue because the house is owned joint, and the ownership automatically passes to the surviving spouse.  However, when the surviving spouse passes away, the house is part of the surviving spouse’s estate that will be subject to the probate process.  You typically try to avoid probate because the probate process: 

• Is a costly process

• It delays the receipt of the asset by your beneficiaries

• Makes the value of your estate accessible to the public

The costs come in the form of attorney fees, accountant fees, executor commissions, and appraisal fees which are necessary to probate the estate. The delays come from the fact that it’s a court driven process. You have to obtain court issued letters of testamentary to even start the process and the courts have to approve the final filing of the estate. It’s not uncommon for the probate process to take 6 months or longer from start to finish.

If your house is owned by a revocable trust, you skip the whole probate process. Upon the passing of the second spouse, the house is transferred from the name of the trust into the name of the trust beneficiaries.   You save the cost of probate and your beneficiaries have immediate access to the house.

The Difference Between A Trust and A Will

I’ll stop for a second because this is usually where I get the question, “So if I have a trust, do I need a will?”  The answer is yes, you need both.   Anything owned by your trust will go immediately to the beneficiaries of the trust but any assets not owned by the trust will pass to your beneficiaries via the will. Trusts can own real estate, checking accounts, life insurance policies, and other assets.  But there are some assets like cars and personal belongings that are usually held outside of a trust that will pass to your beneficiaries via the will.   But in most cases, people have the same beneficiaries listed in the will and the trust. 

Children Under The Age of 25

For parents with children under the age of 25, revocable trusts are used to prevent the children from coming into their full inheritance at a very young age.  If you just have a will, both parents pass away when your child is 18, and they come into a sizable inheritance between your life insurance, retirement accounts, and the house, they may not make the best financial decisions. What if they decide to not go to college because they inherited a million dollar but then they spend through all of the money within 5 years?  As financial planners we have unfortunately seen this happen.  It’s ugly. 

A revocable trust can put restrictions in place to prevent this from happening. There might be language in the trust that states they receive 1/3 of their inheritance at age 25, 1/3 at age 30, 1/3 at age 35.  But in the meantime, the trustee can authorize distributions for living expenses, education, health expenses, etc.  The options are limitless and these documents are customized to meet your personal preferences.

Maximum Flexibility

The revocable trust offers the grantor the most flexibility because they are not giving away the asset. It’s still part of your estate, it’s just not subject to probate. At any time, the owners can take the asset back, change the trustee, change beneficiaries of the trust, and change the features of the trust. 

The Benefits Of An Irrevocable Trust

Let’s shift gears to the irrevocable trust.  The benefits of establishing an irrevocable trust include: 

• Avoid probate

• They have children under that age of 25

• Protect assets from a long-term care event

• Reduce the size of an estate

As you will see, the top two are the same as the revocable trust. Irrevocable trust assets avoid probate and are a way of controlling how assets are distributed after you pass away. However, you will see two additional benefit listed that were not associated with a revocable trust. Let’s look at the long-term care event protection benefit. 

Protect Assets From A Long-Term Care Event

When individuals use an irrevocable trust to protect assets from a long-term care event, it’s sometimes called a “Medicaid Trust”.    If you have ever had the personal experience of a loved one needing any type of long-term care whether via home health aids, assisted living, or a nursing home, you know how expensive that care costs.  According to the NYS Health Department, the average daily cost of a nursing home is $371 per day in the northeastern region.  That’s $135,360 per year.

For an individual that needs this type of care, they are required to spend down all of their assets until they hit a very low threshold, and then Medicaid starts picking up the tab from there.  Now the IRS is smart.   They are not going to allow you to hit a long term care event and then transfer all of your assets to a family member or a trust to qualify for Medicaid.  There is a 5 year look back period which says any assets that you have gifted away within the last 5 years, whether to an individual or a trust, is back on the table for purposes of the spend down before you qualify for Medicaid.  This is why they call these trusts a Medicaid Trust.

Medicaid Will Put A Lien Against The House

Now, your primary resident is not an asset subject to the Medicaid spend down.  If your only asset is your house and you have spent down all of your other assets that are not in an IRA or qualified retirement plan, you can qualify for Medicaid immediately.  So why put the house in an irrevocable trust then?  While Medicaid cannot make you sell your primary residence or count it as an asset for the spend down, Medicaid will put a lien against your estate for the amount they pay for your care.  So when you pass away, your house does not go to your children or heirs, Medicaid assumes ownership, and will sell it to recoup the cash that they paid out for your care. Not a great outcome.  Most people would prefer that the value of their house go to their kids instead of Medicaid.

If you transfer the ownership of the house to an Irrevocable Trust, you can live in the house for the rest of your life, and as long as the house has been in the trust for more than 5 years, it’s not a spend down asset for Medicaid and Medicaid cannot place a lien against your house for the money that they pay out for your care.

So if you are age 65 or older or have parents that are 65 or older, in many cases it makes sense for that individual to setup an irrevocable trust, transfer the ownership of the house to the trust, and start the 5 year clock for the Medicaid look back period.   Once you have satisfied the 5 year period, you are free and clear.

Frequently Asked Question

When I meet with clients about this, there are usually a number of other questions that come up when we talk about placing the house in a trust.  Here are the most common:

If my house is in a trust, do I still qualify for the STAR and Enhanced STAR property tax exemption?

ANSWER: Yes

If my house is gifted to a trust, do my beneficiaries still receive a step-up in basis when they inherit the asset?

ANSWER:  As long as the estate attorney put the appropriate language in your trust document, the house will receive a step up in basis at your death.

What if I want to sell my house down the road but it’s owned by the trust?

ANSWER:  It depends on what type of trust owns your house and the language in your trust document.  When you sell your primary residence, as a single tax filer you do not have pay tax on the first $250,000 of capital gain in the property. For married filers, the number is $500,000. Example, married couple bought their house in 1980 for $40,000, it’s now worth $400,000, which equals $360,000 in appreciation or gain in value. When they sell their house, they do not pay any tax on the gain because it’s below the $500,000 exclusion.

If a revocable trust owns your house, you retain these tax exclusions because you technically still own the house. If an irrevocable trust owns your house, depending on the type of irrevocable trust you establish and the language in your trust document, you may or may not be able to utilize these exclusions.

Many of the irrevocable trust that we see drafted by estate attorneys that exist for the purpose of avoiding probate and protecting asset from Medicaid are considered grantor trusts. The estate attorney will often put language in the document that protects the assets from Medicaid but allows the grantor to capture the primary residence capital gains exclusion if they sell their house at some point in the future.  But this is not always the case.  If you establish a irrevocable trust for your primary residence, it’s important to have this discussion with your estate attorney to make sure this specific item is addressed in your trust document.

Now, here is the most common mistake that we see people make when they sell their house that is owned by their irrevocable trust.  You put your primary residence in an irrevocable trust six years ago so you are now free and clear on the five year look back period.  You decided to sell your current house and buy another house or sell your house and put the cash in the bank.  At the closing the buyers make the check payable to you instead of your trust.  You deposit the check to your checking account and then move it into the trust account or issue the check to purchase your next house.  Guess what? The 5 year clock just restarted.  The money can never leave the trust. If your intention is to sell one house and by another house, at the closing they should make the check payable to your trust, and the trust buys your next house.

Does the trust need to file a tax return?

ANSWER: Only irrevocable trusts have to file tax returns because revocable trusts are built under the social security number of the grantor. However, if the only asset that the irrevocable trust owns is your primary residence, the trust would not have any income, so there would not be a need to file a tax return for the trust each year.

Are irrevocable trusts 100% irrevocable?

ANSWER: There are tricks that estate attorneys use to get around the irrevocable restriction of these trusts.  For example, the trust could make a gift to the beneficiaries of the trust and then the beneficiaries turn around and gift the money back to the grantor of the trust. Grantors can also retain the right to change who the trustees are, the beneficiaries, and they can revoke the trust.  Bottom line, if you really need to get to the money, there are usually ways to do it.

How To Establish A Trust

You will need to retain an estate attorney to draft and execute your trust document. For a simple revocable or irrevocable trust, it may cost anywhere from $2,000 – $5,000.  Before people get scared away by this cost, I remind them that if their house is subject to probate their estate may have to pay attorney fees, accountant fees, appraisal fees, and executor commissions which can easily total more than that.

In the case of a long-term care event, I just ask clients the question “Do you want your kids to inherit your house that you worked hard for or do you want Medicaid to take it if a long-term care event occurs down the road?”  Most people reply, “I want my kids to have it.” Putting the house in an irrevocable trust for 5 years assures that they will.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Medicaid Spend Down Process In New York

You are most likely reading this article because you had a family member that had a health event and the doctors have informed you that they are not allowed to go back home to their house and will need some form of health assistance going forward.  This article was written to help you understand from a high level the steps that you may need to take to get them the care that they need and to get a preview of the Medicaid application process and the spend down process, if that’s the path that needs to be taken.

Everyone is living longer which is a good thing but it creates more complications later in life. It is becoming much more common that people have family members that have a health event in their 80’s or 90’s that renders them unable to continue to live independently. Without advance planning, a lot of the important decisions then have to be made by family and friends so it is important for even younger individuals to understand how the process works because you may be in this situation some day for a loved one.

Do I Have To Apply For Medicaid To Pay For Their Care?

What you will find out very quickly is any type of care whether it's home health care, assisted living, or a nursing home, is very expensive. Very few individuals have the assets and the income to enable them to pay out of pocket for their care without going broke. It's not uncommon for kids or family members to have no idea what mom or dad's income and asset picture looks like. But no one is going to provide you with this information unless you have a power of attorney.

Power of Attorney, Health Proxy, and Will

A power of attorney (“POA”) is a document that allows you to step into a person’s shoes that have been incapacitated. It allows you to get information on their bank accounts, investments, insurance policies, and anything else financially. If you do not have a power of attorney, you need to get one quickly.  A lot of financial decisions will most likely need to be made in a very short period of time. You will need to contact an estate attorney to draft the power of attorney. There are some choices that you will have to make when you draft the documents as to what powers the “POA” will have. They can usually be turned around by an attorney in 48 hours if needed.

While you have the estate attorney on the phone, you also will want to make sure that they have a health proxy and a will. The health proxy allows you to make healthy decisions from a family member if they are unable to do so. While it’s difficult to think about, health proxies will typically list out the end of life decisions. For example, a health proxy may state that mom or dad refuses to have a machine breathe for them if they are no longer able to breathe on their own. The questions are tough to answer but it’s very important to have this document in place.

Home Care, Assisted Living, or Nursing Home

Prior to the health event, mom or dad may have been living by themselves at their house. Now the doctor is telling them that because of the damage done by the stroke, that they will not release them from the hospital until other arrangements are made for their care. There are three options to receive care:

• Receiving care in the home via home care by health aids

• Assisted living facility

• Nursing home facility

People that cannot pay for 100% of their care and that do not have a long term care insurance policy, typically have to spend down their personal assets and then apply for Medicaid.  Now that is said, let's jump right into what is protected and not protected as far as income and assets for Medicaid.

Different Rules For Different States

Each state has different eligibility and spends down rules when it comes to Medicaid. For purposes of this article, we will assume that the person needing the care is a resident of New York. If you live in a different state, the process will be similar but the actual amounts and the definition of "protected" assets may be different. It's usually best to work with a Medicaid planner, estate attorney, or local social services office that is located within your state/county to obtain the rules for your family member that needs care.

The Medicaid Rules In New York

There are different limits based on whether the family member needing care is married and their spouse is still alive or if they are single or widowed. In general, if a couple is married and one spouse needs care, more assets and income will be able to be protected and they will be able to qualify for Medicaid because they recognize that income and assets have to be available to support the spouse that does not need the care. But for purposes of this article, we will assume that mom passed away and dad now needs care.

Asset Limit

In 2018, to qualify for Medicaid, an individual is only allowed to keep $15,150 in assets. The next question I get is "what counts toward that number?" It's actually easier to explain what DOES NOT count toward that number. The only assets that do not count toward that threshold are as follows:

• Primary Residence

• 1 Vehicle

• Pre-Tax Retirement Accounts (if older than age 70½) - (However Required Minimum Distribution goes toward care)

• Irrevocable Trust (Funded at least 5 years ago)

• Pre-paid burial expenses

That's it. If dad has $50,000 in his checking account, $20,000 in a Roth IRA, and a RV, the RV will need to be sold and he will need to spend down the Roth IRA and the checking account until the balance reaches $15,150 in order to apply for Medicaid.

Primary Residence

Very important, while the primary residence is a protected asset for purposes of the Medicaid application, Medicaid will place a lien against dad’s estate for the money that they paid on his behalf. Meaning when he passes away, the kids do not automatically get the house. Medicaid will be first in line after the house is sold waiting to get paid. The amount depends on how much Medicaid paid out. If dad lives in a house that is worth $200,000 and Medicaid during his lifetime paid out $120,000 for his care, when the house sells, Medicaid will get $120,000 and the beneficiaries of the estate will only get the remaining $80,000.

When kids hear this they typically get upset because mom and dad worked their whole life to payoff the mortgage and maintain the house and now they are going to lose it to Medicaid. Is there anything that can be done to protect it? If the house was not put into a Medicaid Trust 5 years before needing to qualify for Medicaid then no, there is nothing that can be done. That’s why advanced planning is so important.

If dad worked with an estate attorney to establish a Medicaid trust 5 years ago, the attorney could have changed the ownership of the house to the trust, once dad makes it by 5 years without a health event, it’s no longer a countable asset for Medicaid and Medicaid cannot place a lien against the house. The question I usually ask our clients is “do you want Medicaid to get your house or do you want your kids to have it?” Most people say their kids but if advanced planning was not completed, you lose this options.

No Gifts To Kids

So what if you change the name on the house to the kids? It's considered a "gift". All gifts made within the last five years are a countable assets. It's called the "5 year look back period". When you apply for Medicaid for dad you have to provide them with a ton of information including 5 years of all statements for bank accounts and investment accounts. Also you have to provide them with copies of all checks written over the past 5 years that were in excess of $1,000. Medicaid is making sure that you did not "give" all of dad's assets away last minute so he could qualify for Medicaid and avoid the spend down.

Income Limits

We have talked about assets but what about income? It's not uncommon for a parent to be receiving a pension and/or social security. They are only allowed to keep $842 per month in 2018. The rest of their income will be applied toward their care. This can create some tough decisions if dad has to go to assisted living or a nursing home and the family has to maintain the house and meet his financial needs on $842 per month. Again, Medicaid it trying to recoup as much as it can to pay for dad's care.

Medicaid Pooled Trust

There are ways to protect income above the $842 threshold through the use of a Medicaid Pooled Trust. Unlike the Medical Irrevocable Trust to protect assets that needs to be established 5 years prior, these trusts can be establish now to protect more income. They work like a special checking account that can only be used to pay bills in dad's name. You can never withdraw cash out of the accounts. As long as dad is considered "disabled" by the social security administration or NYS he may qualify to setup this trust. There are not-for-profit entities that administer this income trust. Basically his income from social security and pension would be deposited to this trust account and then when bills show up for utilities, property taxes, car payment, etc, you submit the bill to the organization that is administering the trust and they pay the bill on behalf of that individual.

Home Care Limitation

Most individuals want to return to their home and have the care provided at their house via home health aids.  This may or may not be an option. It all depends on the level of care needed. If Medicaid will be paying for dad's care, you will need to call the social services office in the county that he lives in. They will send an "assessor" to his house to determine if the living conditions are adequate for home care and they will also determine the level of care that is needed. In general, if the estimated cost of home care is expected to be at least 90% of what it would cost for care at a facility, Medicaid will not pay for home care and will require them to go to an assisted living or nursing home facility.Home health aids typically range in price from $15 - $30 per hour. Assume it cost $25 per hour, if dad needs care 8 hours a day, 7 days a week that would cost $6,083 per month. If you need a nurse or registered nurse to administer medication at the home, you are looking at $40+ per hour for those services.

Steps From Start To Finish

We have covered a lot of ground and this is just a general overview. But here is a general list of the steps that need to be taken assuming dad had a health event and you need to apply for Medicaid on his behalf:

• Contact an estate attorney to establish a power of attorney and requirement for Medicaid application

• Using the POA, begin collecting financial information for the Medicaid process

• Contact the county social services office to request an assessment to determine if home care will be an option if it's in question

• If a spend down is required to qualify for Medicaid, work with estate attorney to develop spend down strategy

• If monthly income is above threshold, determine if a Medicaid pooled trust is an option

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.