Gifting primary residence into irrevocable trust

[theodore2]

What is the name of your state? New York and Florida.

Elderly parents, in good health, live in house in Florida. Since adult children live in New York, it was suggested that they gift their house into an irrevocable trust drafted in New York, because New York allows the termination of an irrevocable trust if all trustors and all trustees agree. Suggested benefit is that, if catastrophic illness occurs within 5years and one parent needs medicaid, irrevocable trust can be terminated, house can be deeded back to the one healthy parent (or even into a ladybird deed with the one healthy parent and the adult children), and therefore house would be exempt asset and the former gift into the irrevocable trust would be nullified and therefore not trigger a penalty period. Would that work?

 

[Taxing Matters]

What is the name of your state? New York and Florida.

Elderly parents, in good health, live in house in Florida. Since adult children live in New York, it was suggested that they gift their house into an irrevocable trust drafted in New York, because New York allows the termination of an irrevocable trust if all trustors and all trustees agree.

It is not a matter of where the trust is drafted, but in what state the trust is settled, that determines which state's law governs the trust. Who suggested this particular strategy? There are several potential problems that I see with it.

First, without directly stating it, it sounds like the goal here is to plan into medicaid benefits for nursing home care while preserving significant assets to pass on to their kids. While I understand why at first glance this often sounds good, Medicaid does not pay a great deal for these benefits, and thus the type of care you can get with them is generally not very good. I tell clients wanting to do this sort of planning to first check out what they can get on those benefits. When they see what they'd get, quite a few of them decide to do something different to live better for as long as they can before going to Medicaid benefits, even if that means their kids will inherit less or even nothing.

Second, assuming the trust is drafted correctly and that you are right that NY trust law would allow the termination and revocation of the trust on the consent of everyone involved (and likely that means consent of the beneficiaries, too, with an irrevocable trust, though you did not mention beneficiaries) that means that the couple is counting on everyone being agreeable to their wishes should they want to back out of the trust. That has two problems. First, of course, is that one or more of those folks may later decline to agree to revoke the trust, leaving them stuck. Second, if there is a formal or informal agreement or understanding that they will revoke when the parents want them to do it, then the trust will generally fail to be an irrevocable trust, screwing up the Medicaid planning.

If the trust is irrevocable and has no other features that would make it a grantor trust under the Internal Revenue Code (IRC) then when the property is transferred to the trust, that will be a gift to the trust and its beneficiaries. That will trigger a requirement to file a federal gift tax return for the parents and will use up some of their lifetime unified credit against gift and estate taxes (assuming they haven't used that up yet). That then reduces what they can give away during life or at death and not incur federal estate and gift taxes. If they will never have assets that for each of them would exceed $5 million that might not be a problem. But by putting the house into an irrevocable trust, they destroy the chance to get a step up in basis for the home at their death, which can lead the trust or beneficiaries to pay significantly more in income tax on the later sale of the home. I'd be careful, too, because having the trust settled in NY may subject the trust to taxation in NY. That might result in income tax paid to NY, and NY is fairly expensive for income tax.

Before they do this, I'd recommend they see both an estate planning attorney and tax attorney for advice on what plan will best meet their needs. And that they tour a few nursing homes that will accept what Medicaid will pay for their fees, preferably surprise visits where the home can't hide the problems as easily.

 

[TrustUser]

an irrevocable trust that can be revoked ??

gosh that reminds me of a life sentence with a 5-year eligibility for parole!!

 

[theodore2]

an irrevocable trust that can be revoked ??

Strangely, yes. For example:
https://www.recordonline.com/news/20181103/bonnie-kraham-irrevocable-trusts-are-revocable-in-new-york

 

[TrustUser]

you dont even need the beneficiaries

imo, this was never an irrevocable trust

and i suspect that it could be legally challenged, if there was ever a reason to do so