Tax Impact of putting rental property into trust

[cny-man]

What is the name of your state? NY

We are considering an irrevocable trust for purposes of protecting assets from Medicaid. We currently own two rental properties that could be put into the trust. Our taxable income is low enough that the income from those properties is not currently taxed. If we put the properties into a trust would the trust pay taxes on net rental income received? Thank you.

 

[Taxing Matters]

What is the name of your state? NY

We are considering an irrevocable trust for purposes of protecting assets from Medicaid. We currently own two rental properties that could be put into the trust. Our taxable income is low enough that the income from those properties is not currently taxed. If we put the properties into a trust would the trust pay taxes on net rental income received? Thank you.

Quite possibly. If the trust does not pay out income to the beneficiaries then the trust pays the income tax, and the rates for the trust are much more progressive than for individuals. You'd need to see a tax professional familiar with trust taxation to run the numbers and explain to you how the move would impact the income tax picture. Note, too, that by doing this the beneficiaries of the property will not get a step up in basis in the property on your death, which could mean a rather large capital gain on which tax would be paid that could have been avoided with a revocable trust or other grantor trust.

Note too that a gift to an irrevocable trust will trigger the requirement to file federal gift tax returns, too. You may not end up owing any federal gift tax, but at the very least you would use up some of the lifetime credit you have against gift and estate tax.

Finally, planning for Medicaid to preserve assets for your kids sounds great in theory, but in practice may turn out not be what you want. The problem is that in general care facilities that would accept you for just what Medicaid pays are not all that great; some are down right terrible. Tour a few such places in your area, preferably on unannounced visits so they can't hide problems, and see what you'd be be getting. You may find that you'd prefer to use your own assets for something better for as long as you can before shipping off to a facility that will take you for just Medicaid.

I'd strongly recommend seeing an elder law/estate planning lawyer to run through your options and help advise you on the best plan for your situation.

 

[LdiJ]

What is the name of your state? NY

We are considering an irrevocable trust for purposes of protecting assets from Medicaid. We currently own two rental properties that could be put into the trust. Our taxable income is low enough that the income from those properties is not currently taxed. If we put the properties into a trust would the trust pay taxes on net rental income received? Thank you.

Yes, the trust would pay taxes on any rental profit. The tax rates for trusts are also higher than the tax rates for individuals. You could be cutting off your nose to spite your face trying to protect your assets from Medicaid, when you do not know whether or not you will ever need nursing home care.