Should I Transfer My Mother’s Home to a Revocable or Irrevocable Trust?
I would like to set up a trust in my mothers name. I am her POA and health advocate. Mom was able to get Medicaid this past May and my promise was to keep her in her home and avoid a nursing home. I was told that a trust allows the beneficiaries not to pay tax on the inheritance. The only asset mom has is her home and a few dollars in the bank. The trust specifies that the home will be equally divided once sold. Does the estate pay taxes on the proceeds from the sale of the home, or is it not taxable, since it’s in a trust? The home value is $350,000. Knowing this, would an irrevocable or revocable trust be best? She resides in New York.
Also, my elder brother is of the belief that in an irrevocable trust, one cannot get a home equity loan if needed. Is that true?
You have raised three issues: taxes, Medicaid, and a home equity loan. I will address each in turn.
With respect to taxes, you can create either a revocable trust or an irrevocable trust for your mother’s benefit. They both would avoid probate. Given the value of the home, there will be no estate or inheritance tax upon your mother’s death. In addition, upon your mother’s death, the house will receive what’s called a “step up” in basis, so there won’t be any capital gains tax upon your mother’s death. In short, whether you create a trust, or depending on which type you create, it will have no tax effect because your mother’s estate will not be subject to tax in any case. But either type of trust may make things easier by avoiding probate.
With respect to Medicaid, whether to use a revocable or irrevocable trust has more impact. Both would avoid probate and thus Medicaid estate recovery. They may or may not trigger a Medicaid transfer penalty. That depends on each state’s application of the rules, so you would need to consult with an experienced elder law attorney in New York to be sure.
In terms of a home equity loan, your brother is right. You would not be able to borrow against the house in an irrevocable trust. A bank might also require you to remove the house from a revocable trust to get a loan. My advice would be to get the home equity loan first and then transfer the house into a revocable trust (assuming you determine it doesn’t cause any Medicaid problems in New York).