SALE OF HOME OWNED BY LIVING TRUST

It should come as no surprise to our clients that the sale of a residence owned by a revocable living trust will entitle the owner to the full use of the $250,000 (for a single person or married filing separately) or $500,000 (for a married couple) capital gains tax exemption. See PLR 199912026. For income and estate tax purposes, the taxpayer and the trust are treated as one, as well they should be. A revocable trust has little, if any, estate, gift and income tax effect. This is because the taxpayer has not really done anything to take control away from the taxpayer. If a taxpayer wants to protect assets from creditors and others, the taxpayer will need to use an irrevocable trust.

There are circumstances where an owner could use an irrevocable trust without it affecting the life style and living conditions of the owner transferring the residence to the trust. If a residence is transferred to an irrevocable trust which has certain tax favored provisions, the trust and the taxpayer\owner will be treated as one and the same to the irrevocable trust. (This is the same effect as a transfer to a revocable trust for tax purposes.) When the house is sold, the income tax (or capital gains tax) exemptions are available just as would be true for the revocable trust. So no harm has been done.

If the person transferring becomes ill or disabled, the placing of the residence in the irrevocable trust will protect the residence from a Medicaid lien and will protect the residence against the claims of creditors. Moreover, there are other tax benefits to using an irrevocable trust. The question for most people is whether the administrative burdens of handling the trust are worth the benefits. The answer to that questions may depend on how important it is to use the irrevocable trust.