A question asked time and again is whether the house transferred into the Medicaid Asset Protection Trust can be sold.
The answer is: YES. The next question is what happens? The following will attempt to answer this question.
Sally of Smithtown, New York transferred her house into a Medicaid Asset Protection Trust eight years ago. She accomplished this by creating the irrevocable trust and naming her son, Harold of Hauppauge, New York the trustee. She then executed a deed transferring the house from Sally, the individual, to Harold, as trustee of the trust. Since this time she has lived in the house as she had done the previous twenty five years. Her real estate taxes remained the same (based on her age and income) and she was still personally responsible to pay the taxes and insurance. This continued because the trust was designed to be a grantor-type trust for tax purposes. Additionally, each year she deducted the real estate taxes on her personal income tax return when she itemized deductions on Schedule A.
Recently, Sally decided the house has become too big for her and she needs to “downsize.” She told her son, Harold, to sell the house and purchase her a condo in the neighboring town of Commack. Harold, as trustee: listed the house, entered into a contract with the buyers (the Kelly family from Kings Park), and sold the house. Harold as trustee performed these tasks as trustee on behalf of the trust (the legal owner of the house). At the closing, the Kelly’s made the checks payable to the trust and Harold deposited the checks into the trust bank account he had opened at the St. James branch of the Bank of Smithtown.
Sally had originally purchased the house for $80,000.00 thirty three years ago and the trust sold the house for the fair market value price of $350,000.00. During the thirty three years Sally owned the home, she made capital improvements totaling $20,000.00. Hence the capital gains calculation is as follows:
Sales price of $350,000.00 less $100,000.00 (original cost basis and capital improvements) = $250,000.00 of capital gain. However, because the house has been Sally’s primary residence for at least two of the last five years, she is entitled, pursuant to Internal Revenue Code section 121, to a $250,000.00 exclusion from capital gains. This exclusion applies despite the fact that the trust is legally owned by the trust; again this is because the trust is a grantor-type trust for income tax purposes.
To be continued ….
Aaron E. Futterman, CPA, Esq. is a partner in the law firm of Futterman & Lanza, LLP with offices in Smithtown, NY and clients throughout Suffolk, Nassau, New York City, Westchester and Rockland Counties. He concentrates his practice to Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate, Estate Taxes, and Estate Administration.