Jurisdictional Issues Trusts are generally subject to the jurisdiction where the grantor is domiciled at the time the trust is created. Other states that may have jurisdiction over the trust include: Where the trustee is located Where the trust assets are held The jurisdiction in which real estate sits always holds jurisdiction over the real estate and any trust that holds it. This may even be true where the trust’s choice of law provision dictates an alternative state. Attorneys must be careful not to give legal advice about the other state’s laws when drafting a trust that will be governed by another state. (where the attorney isn’t licensed in the other state)

Capital Gains Issues in Real Estate Especially important for real estate because people tend to hold real estate for long periods of time and real estate generally tends to appreciate significantly in the long term. Capital gains in real estate transactions are typically long term capital gains. Taxed at a lower rate than short term gains If a client dies while owning appreciated real estate, the “step up” in cost basis can save capital gains tax when the property is later sold. Generally, if it’s in the taxable estate of the grantor, you get the step up Slightly different rules for decedents dying in 2011 or 2012

The Section 121 Exemption Section 121 allows an exemption from capital gains tax for residential real estate sold for a capital gain: Up to $250,000 for an individual Up to $500,000 for a married couple holding the land To qualify for the exemption, the owners must: Have lived in the home as a “principal residence” for at least two of the previous five years; and Own the residence at the time of the sale. If you’ve lived in the house for less than two years but moved for certain purposes such as work, you may be able to get a partial exemption.

How to Keep the 121 Exemption If you transfer a house to a trust, you no longer own it for the purposes of the 121 exemption. Therefore, transferring the house to a trust can cause the client to lose the 121 exemption if the house is sold. The good news: Section 121 is an income tax rule; so if the house is considered the client’s for income tax purposes, it’s eligible for the section 121 exemption. So, if the trust is a “grantor” trust for income tax purposes, the property in the trust should be eligible for the section 121 exemption Therefore, most trusts that hold residential estate should be grantor trusts.

Medicaid: Available Resources If a person owns real estate that he or she does not live in, that real estate is considered an available resource! A person’s residence is not considered an available resource Up to $500,000 in equity ($750,000 in some states) Equity beyond that IS an available resource To get this protection one of the following has to live in the house: The applicant The applicant’s spouse Minor or adult disabled child of the applicant Sibling of the applicant with an equity interest in the home and who has been living in the home for at least a year prior to the applicant’s admission to a nursing home

Medicaid Lien on Residence Even when nobody lives in the house, Medicaid will not make the applicant sell a residence that he or she intends to return to. However, in this case and others where the residence is exempt, Medicaid may put a lien on the property. And it will foreclose on the house or collect its reimbursement from the house after the death of the applicant. Therefore, transferring the house to prevent the eventual lien makes sense even when you’re dealing with a primary residence. However, this gift does cause the 5 year period of ineligibility. If there is a need within 5 years, the transaction can be undone to remove the period of ineligibility, though this reinstates the lien problem, of course.

Caregiver Child Exemption A transfer does not cause the five year period of ineligibility if: It was the applicant’s primary residence The child lived in the residence The child cared for the parent in the residence However, this can lose benefits of home ownership including: Section 121 exemption Step up in cost basis Property tax benefits

Property Tax Exemptions Many states give property tax breaks for people who live in their own home. Often, this requires either that the person have the right to live in the home or the right to all beneficial enjoyment. Make sure to know the rules of your state! So, if you prepare a property trust for someone, the trust can give the person the rights to the residence necessary to keep the property tax breaks in that state. You always want to try to do this without giving the client rights that would be considered available resources for Medicaid purposes. Example: You probably don’t want to give the client an income interest.

Qualified Personal Residence Trust This is a way to give away a personal residence in a manner that: Allows the client to keep living in the house; but Allows the house to be removed from the taxable estate of the client Normally, if you’re keeping a life interest in the property, it’s in your estate; a QPRT is a way to make sure that you can live there and remove it from the taxable estate The grantor gifts the house to the QPRT and retains the right to live there for a certain number of years. The value of the gift is subject to gift tax The QPRT must have a “term” that the grantor must survive for the QPRT to be effective in removing the house from the estate of the grantor.

QPRT - Requirements 1) The trust must be established for a specific term 2) All income generated by the trust must be distributed to the Grantor during the term of the trust 3) No person other than the Grantor, spouse and dependents may reside there rent-free or get a benefit from the trust 4) The Grantor may not be allowed to re-acquire the residence by purchasing it from the trust After the term is over, the grantor must pay market value rent to the QPRT for as long as he or she resides in the residence This can be another way to reduce the client’s taxable estate