Reed: Big Mistake: Putting the house in a trust

Sandra W. Reed

The Collier family thinks their mother should put her home into a trust to protect it from taxes and to avoid probate. Good idea or big mistake? This is a big mistake. Here’s why.

Sandra Reed

Loss of homestead exemption

Putting the homestead into a trust disqualifies it for the homestead exemption that Mrs. Collier receives while the home is in her name. Instead of reducing taxes, placing the residence in a trust increases the ad valorem taxes.

Loss of stepped-up basis

Mrs. Collier and her deceased husband bought their home in 1980. The home is worth more than double the amount they paid initially and the amounts spent on improvements over the years. Those amounts constitute the basis in the property for determining the amount of capital gains tax due upon sale of the property. If the home is left in Mrs. Collier’s name and passed to her children at her death, the basis for the children will be stepped up to the value of the property at the time of Mrs. Collier’s death. Thus, if they sell the property then, they will owe no capital gains tax.

If Mrs. Collier places her home into a trust now, the basis will be limited to the purchase price and improvement expenses. Thus, whenever the property is sold at the appreciated value, substantial capital gains taxes are likely to be owed. Once again, the goal of decreasing taxes is thwarted. Taxes are increased rather than reduced.

Loss of exemption as asset for Medicaid qualification

If the applicant has the intent to return to the homestead from the nursing home, a homestead in the applicant’s name is not countable toward the $2,000 in assets an applicant can have and still qualify for Medicaid. This is true even if it is not medically possible to return to the home. If Mrs. Collier places her home in a trust, she will have converted a noncountable asset into a countable one. Thus, the homestead in trust will prevent her from qualifying for Medicaid to pay for long-term nursing home care.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at (254) 797-0211; (817) 946-2809 or at sreed@kbzlaw.com.