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Understanding Your Irrevocable Trust

Before you decide to put your home in an irrevocable trust, it is important to have a basic understanding of what you are doing and why.  Keystone Elder Law PC would not help you to do this without counseling to make sure than you have some understanding of both the advantages and disadvantages of such a trust.

After you deed your home to an irrevocable trust, you will not be able to modify, amend, or terminate your trust without the permission of the beneficiary or beneficiaries who you name.  You will have transferred all of your rights of home ownership to the trust.  You may enter into a separate legal agreement with the trustee of the trust to ensure your legal right to occupy the home, perhaps in exchange for accepting the duty to pay the expenses of the home.

Forty years ago, mortgage rates escalated to over 18%.   Lenders have learned to protect themselves by inserting a clause in the mortgage to make payment in full due on any sale or transfer of the deed.  The Garn St. Germain Act provides an exception so that your mortgage is not due for a transfer of the deed into this trust.  But it could be a challenge later to refinance a mortgage.

The primary reason that you would decide to put your home in a trust is usually to prevent the value of your home from being lost to any future creditor.  This includes protecting the house equity from the cost of nursing home care, either during your life or afterwards. After your death, the Pennsylvania Department of Human Services (DHS) routinely will initiate a collection action against your estate to recover the amount DHS paid for your nursing care. 

This asset preservation plan will work as long as your trust remains intact, and you do not apply for financial assistance from DHS for at least sixty months from the date that the deed which transferred your home to the trust was recorded at the courthouse.  If due to your age or an underlying medical condition you believe that either you or your spouse will probably need long-term care within sixty months, it would not be wise to deed your home to a trust.

There are tax benefits of an irrevocable trust.  If you live for at least one year after the home is deeded to the trust, then there will be no PA Inheritance Tax on the value of the home in the trust.  Otherwise, if your children are the heirs, they would pay a 4.5% tax of the home’s value at your death.

Additionally, if the trust is prepared by a knowledgeable elder law attorney, it is probable that the capital gain on the eventual sale of the home by the trust after your death will be taxed based on the home’s value at the time of sale rather than either the value at the time it is placed into the trust, or your date of death. 

If there is nothing in the trust but your home, the taxpayer ID of the trust will be your Social Security number, and no annual tax return is required.   If you put other income-producing assets in the trust, then a separate EIN number is needed, and annual tax returns are required.  Taxes due from a trust are normally at rates higher than if paid otherwise.

You are permitted to own a home when you apply for assistance from DHS.   Even without a trust, a DHS estate recovery action would not occur until the death of both spouses whose names appear on the title of the home deed.  When the last of the homeowners dies, a probate action is required to sell or transfer the ownership of the house.   DHS would then make a claim to recover all of the funds it paid for nursing care before your beneficiaries would receive any of the home’s value.

It would be wise to obtain legal advice if it becomes necessary to change your trustee or your beneficiaries, or to sell the home and either replace it or otherwise invest the sale proceeds.  You should also get legal advice before you or the trustee use the home as collateral for any debt.

Sometimes people expect an attorney to do future related work for free after a trust has been created.  But few attorneys are either willing or able to do so.  An attorney might handle an occasional follow up call to answer a routine question without sending an invoice.  However, you should expect to pay an additional fee any time a written response or research is required.

Some people feel so proud to be homeowners that what is most important is to make sure that they can leave their home to their children.  Others feel that they do not want anyone telling them what to do with their home.  If you have trouble giving up control, or you do not have full confidence that your trustee will respect your intentions, then you are not a good candidate for an irrevocable trust. 

If you do not put your home in a trust, you should at least have a durable financial power of attorney which specifically gives your agent the power of unlimited gifting.   Under current law it is usually possible to save a substantial portion of the home equity when the home is the last asset of a person who is applying for DHS funding to pay for nursing care. 

The money is saved by selling the home and using a Medicaid-compliant annuity to enable a gift of at least 50% of the remaining equity after the home sale.   This strategy eliminates the need to probate a will, and makes managing the affairs of an estate much easier.

Putting your child’s name on your deed should never be considered as an alternative to using a trust.   That is a separate topic which we have discussed in previous articles that are on our website.

Dave Nesbit, Attorney