Will My Grandmother’s House be Subject to the Massachusetts Estate Tax?
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Question:
I am middle aged, single, and reside with my grandmother who is in her 90s. I help her with day-to-day things. My mother, who is disabled and receives SSDI, lives in the same house. I also help her while I study part time in a master’s degree program. My grandmother owns the house which she put the house in a trust. The tax valuation of the house is more than $1 million. She also has money in the bank exceeding the $2,000 MassHealth limit, and I do not want her to get long-term care outside of the home. (She has Medicare and a Medigap policy.) Does the house, which is in a trust, count in the calculation of the total value of her estate? I am sure her estate is not close to the value beyond which a federal tax must be paid. However, in Massachusetts, estates of more than $1 million are taxed.
Response:
I can’t know for sure without seeing the trust , but it’s most likely that the house will be in your grandmother’s taxable estate and subject to the Massachusetts estate tax. This is definitely the case if it’s a revocable trust and probably also true if it’s an irrevocable trust. Fortunately, the Massachusetts legislature is likely to change the taxation threshold to $2 million if it ever completes its budget this year. It sounds like that would solve the problem for your grandmother.
If your grandmother still has a taxable estate, whether because it exceeds $2 million or the legislature doesn’t get its act together, be aware that there is at least one major advantage to the house being in her estate. It is that it will get a step-up in basis, meaning that when it is sold the capital gain will be calculated as the difference between the sale proceeds and the value on your grandmother’s date of death rather than the difference between the proceeds and your grandmother’s purchase price for the property. The resulting tax savings is likely to far exceed any estate tax due. The downside is that estate taxes are due nine months from the date of death while taxes on capital gains are only due when the property is sold, when the cash to pay the taxes is more likely to be available.
You don’t say how much cash your grandmother has exceeding the $2,000 MassHealth (Medicaid in Massachusetts) asset limit. Whatever it is, she may want to transfer it for two reasons. First, depending on her income she might qualify for MassHealth which could substitute for her Medigap insurance and pay for some home health assistance, if your grandmother needs it. Second, anything your grandmother gives away during her life will not be taxed at her death.
If you determine that it makes sense for your grandmother to transfer her savings, be aware that if she were to require nursing home care (which you’re trying to avoid), it could cause her to be subject to a transfer penalty that would make her ineligible for MassHealth coverage of nursing home care for up to five years. However, there is an exception to this penalty. Due to your mother’s disability, there will be no penalty if your grandmother transferred her savings to a trust solely for your mother’s benefit.
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Attorney Margolis,
Thank you kindly for addressing my question.
I am uncertain regarding my comprehension of part of your reply: In the second to the last paragraph in your reply, it states that my grandmother may want to transfer her cash.
The amount of cash she has is less than $500K. (Regarding the house, my grandmother, mother, & I do not want to sell the house following the passing of my grandmother because we want my mother, who is disabled, to reside in the house for the duration of her life.)
I am unsure to whom/what my grandmother may want to transfer her cash. Are you stating that she might want to transfer her cash to the account of family member while she is still alive or that she might want to create a trust for her cash to which she would transfer it? Please advise when you are able to do so.
Donna,
This is complicated. Your grandmother could transfer her cash either to reduce the estate tax on her death (which might be resolved in any case if the Massachusetts legislature raises the estate tax threshold) or to qualify for MassHealth. Depending on her goal, the the type of transfer might be different, a trust or an outright transfer. Further, it’s likely that it makes sense that whatever your grandmother leaves your mother should be in trust. However, the terms of the trust would be different depending on whether it’s a lifetime gift or one that occurs upon your grandmother’s death.
I strongly recommend that your grandmother consult with a Massachusetts attorney who is familiar with both estate planning and public benefits rules to come up with a plan that best meets her goals.
Harry