Recently, we came across an article by a syndicated columnist that claimed that if you put your house into an irrevocable trust you lose your exclusion from the capital gains tax on the sale of the primary residence — $500,000 for a couple and $250,000 for a single person. The writer, being a financial planner and not a trust and estates lawyer, and despite claiming to be an “expert”, was apparently unaware that there are many different types of irrevocable trusts. One of the most common irrevocable trusts, the Medicaid Asset Protect Trust (MAPT), is designed to preserve these exclusions. MAPT’s are “grantor trusts” which mean they remain in the grantor’s name for all income and capital gains tax purposes.
This leads into a very common problem. Too often, clients receive advice on trusts from financial advisors, accountants and family lawyers, believing they are getting a professional opinion. We say that what they are actually getting is a personal opinion coming out of a professional’s mouth.
We often make the analogy that if, unfortunately, you have cancer then you want to get advice from an oncologist, not your family doctor. If you have an elder law estate planning problem, you want to talk to an elder law estate planning attorney, not your general lawyer, financial advisor or accountant. Well-meaning professionals often give incorrect information.
Here are the most common myths about the MAPT:
- Myth: You can’t sell the house – Reality: We have done it thousands of times. The money is paid to the trust and remains protected. The trust can purchase another house, a condominium or simply invest the money and pay you the income.
- Myth: You can’t change the trust – Reality: You may change the trustees, or who you are leaving it to, at any time.
- Myth: You can’t take money out of the trust – Reality: You get all the income (interest and dividends) and you may gift virtually any amount tax-free to your children.
- Myth: You cannot undo the trust – Reality: In New York you may revoke an irrevocable trust on the consent of all named parties. If one will not sign, we have a workaround.