Is your home owned in an irrevocable trust? If so, you may have a life estate interest in your home and your irrevocable trust may own the remainder interest. This means that you continue to own the exclusive right to live in the home for the rest of your life, and are responsible for all the expenses of ownership including property taxes, insurance, maintenance, utilities and repairs. It means that, upon your death, 100% of the value is owned by the trust. It also means that the trustee cannot sell the home without your consent. Your life estate interest has a monetary value and, if the home is sold during your life, it is essential to know this value and to make sure that the proceeds of the sale are properly administered. Berwitz & DiTata LLP can help. Here are some tips to keep in mind when a decision is made to sell a home that is titled in an irrevocable trust.
First and foremost, even before you call a realtor, know your trust. Be prepared to strictly adhere to its terms. If you are unsure of what you are looking at, get help. Here’s why: mistakes are not only costly to correct but may be uncorrectable. You created the trust to protect the as- sets; a mistake may completely undermine your goals. We like to say that Medicaid qualifying irrevocable trusts are like Humpty Dumpty, once broken, they can never be fixed.
Learn from Smart Client. Some years ago, she had implemented an irrevocable, asset-protection trust for Medicaid planning purposes. The trust owned a remainder interest in her home and she owned a life estate. Her sons are the trustees. Smart Client has lived alone since the death of her spouse and she finds the home hard to maintain. Together, she and her sons decided to sell the home. They called our firm and we reminded them of the terms of their trust and explained the importance of complying with the trust obligations to the letter. We suggested that she bring this to the attention of her realtor and real estate attorney and we offered to answer their questions. Smart Client and her trustees used the proceeds of the sale of her home to purchase a condominium apartment in the trust and, because Smart Client had her professional advisors working together, the Medicaid protection that she had anticipated when she established the trust was preserved and will be accorded to her replacement home.
Ultimately, your realtor and real estate attorney must be apprised that they actually have two clients: you, the life estate holder, and the trustee, the holder of the remainder interest. This will help them understand that they may be apportioning the closing costs and legal fees – because the trust requires it. Berwitz & DiTata LLP is poised to calculate life estate values and advise the realtor and real estate attorney on the apportionment of fees, costs and expenses to comply with the trust’s terms.
Once property in an irrevocable trust is sold, the proceeds of the sale must be properly distributed. If you own a life estate, you may be entitled to some portion of the proceeds but the balance must be deposited into the trust or, more properly, an account in the name of the trust. If these amounts are not precise, you may be breaking Humpty Dumpty! Furthermore, if you are purchasing replacement property, the proceeds from the first sale must be properly handled during the transition and the new property must be properly titled. When purchasing replacement property, if you are purchasing a life estate in the new property, your interest in the new property must also be calculated.
Lastly, if you are already receiving Medicaid benefits and your home is sold, Medicaid will need to be advised. If you were the owner of a life estate, your share of the proceeds must be disclosed. In that event, Berwitz & DiTata LLP can help you formulate a plan to preserve and protect excess resources and communicate with Medicaid on your behalf.