Should You Put Your House In A Trust?

Should You Put Your House In A Trust?

When you say the word “trust” many people think that trusts are only used by the uber rich to protect their millions of dollars but that is very far from the truth. Yes, extremely wealthy families do use trusts to reduce the size of their estate but there are also a lot of very good reasons why it makes sense for an average individual or family to establish a trust. The two main reasons being the avoidance of probate and to protect assets from a long-term care event. This article will walk you through:

• How trusts work
• The difference between a Revocable Trust and an Irrevocable Trust
• The benefits of putting your house in a trust
• How to establish a trust
• What are the tax considerations

What Is A Trust?

When you establish a trust, you are basically creating a fictitious person that is going to own your assets. Depending on the type of trust that you establish, the trust may even have it's own social security number that is called a “tax ID number”. Here is an example. Mark and Sarah Williams, like most married couples, own their primary residence in joint name. They decide to establish the “Williams Family Trust”. Once the trust is established, they change the name on the deed of their house from Mark and Sarah to the Williams Family Trust.

Revocable Trust vs. Irrevocable Trust

Before I get into the benefits of establishing a trust for your house, you first have to understand the difference between a “Revocable Trust” and an “Irrevocable Trust”. As the name suggests, a revocable trust, you can revoke at any time. In other words, you as the owner, can take that asset back. You never really “give it away”. Revocable trusts do not have a separate tax identification number. They are established in the social security number of the owner. A revocable trust is sometime referred to as a “living trust”.

With an Irrevocable Trust, once you have transferred the ownership of the house to the trust, it’s irrevocable, meaning you are never supposed to be able to take it back. The trust will own that house for the rest of your life. Now that sounds super restrictive but there are a lot of strategies that estate attorneys use to ease those restrictions and I will cover some of those strategies later on in this article.

In both cases, in trust language, the owner that gave property to the trust is called the “grantor”. I just want you to be familiar with that term when it is used throughout this article.

So why would someone use an Irrevocable Trust instead of a Revocable Trust? The answer is, it depends on which benefits you are trying to access by placing your house in a trust.

The Benefits Of A Revocable Trust Owning Your House

People transfer the ownership of their house to a revocable trust for the following reasons:

• Avoid probate
• They have children under the age of 25
• They want maximum flexibility

Avoid Probate

From our experience, this is the number one reason why people put their house in a revocable trust. Trust assets avoid probate. If you have ever had a family member pass away and you were the executor of their estate, you know how much of a headache the probate process is. Not to mention costly.

Let’s go back to our example with Mark & Sarah Williams. They own their house joint and they have a will that lists their two children as 50/50 beneficiaries on all of their assets.

When the first spouse passes away, there is no issue because the house is owned joint, and the ownership automatically passes to the surviving spouse. However, when the surviving spouse passes away, the house is part of the surviving spouse’s estate that will be subject to the probate process. You typically try to avoid probate because the probate process:

• Is a costly process
• It delays the receipt of the asset by your beneficiaries
• Makes the value of your estate accessible to the public

The costs come in the form of attorney fees, accountant fees, executor commissions, and appraisal fees which are necessary to probate the estate. The delays come from the fact that it’s a court driven process. You have to obtain court issued letters of testamentary to even start the process and the courts have to approve the final filing of the estate. It’s not uncommon for the probate process to take 6 months or longer from start to finish.

If your house is owned by a revocable trust, you skip the whole probate process. Upon the passing of the second spouse, the house is transferred from the name of the trust into the name of the trust beneficiaries. You save the cost of probate and your beneficiaries have immediate access to the house.

The Difference Between A Trust and A Will

I’ll stop for a second because this is usually where I get the question, “So if I have a trust, do I need a will?” The answer is yes, you need both. Anything owned by your trust will go immediately to the beneficiaries of the trust but any assets not owned by the trust will pass to your beneficiaries via the will. Trusts can own real estate, checking accounts, life insurance policies, and other assets. But there are some assets like cars and personal belongings that are usually held outside of a trust that will pass to your beneficiaries via the will. But in most cases, people have the same beneficiaries listed in the will and the trust.

Children Under The Age of 25

For parents with children under the age of 25, revocable trusts are used to prevent the children from coming into their full inheritance at a very young age. If you just have a will, both parents pass away when your child is 18, and they come into a sizable inheritance between your life insurance, retirement accounts, and the house, they may not make the best financial decisions. What if they decide to not go to college because they inherited a million dollar but then they spend through all of the money within 5 years? As financial planners we have unfortunately seen this happen. It’s ugly.

A revocable trust can put restrictions in place to prevent this from happening. There might be language in the trust that states they receive 1/3 of their inheritance at age 25, 1/3 at age 30, 1/3 at age 35. But in the meantime, the trustee can authorize distributions for living expenses, education, health expenses, etc. The options are limitless and these documents are customized to meet your personal preferences.

Maximum Flexibility

The revocable trust offers the grantor the most flexibility because they are not giving away the asset. It’s still part of your estate, it’s just not subject to probate. At any time, the owners can take the asset back, change the trustee, change beneficiaries of the trust, and change the features of the trust.

The Benefits Of An Irrevocable Trust

Let’s shift gears to the irrevocable trust. The benefits of establishing an irrevocable trust include:

• Avoid probate
• They have children under that age of 25
• Protect assets from a long-term care event
• Reduce the size of an estate

As you will see, the top two are the same as the revocable trust. Irrevocable trust assets avoid probate and are a way of controlling how assets are distributed after you pass away. However, you will see two additional benefit listed that were not associated with a revocable trust. Let’s look at the long-term care event protection benefit.

Protect Assets From A Long-Term Care Event

When individuals use an irrevocable trust to protect assets from a long-term care event, it’s sometimes called a “Medicaid Trust”. If you have ever had the personal experience of a loved one needing any type of long-term care whether via home health aids, assisted living, or a nursing home, you know how expensive that care costs. According to the NYS Health Department, the average daily cost of a nursing home is $408 per day in the northeastern region. That’s $148,920 per year.

For an individual that needs this type of care, they are required to spend down all of their assets until they hit a very low threshold, and then Medicaid starts picking up the tab from there. Now the IRS is smart. They are not going to allow you to hit a long term care event and then transfer all of your assets to a family member or a trust to qualify for Medicaid. There is a 5 year look back period which says any assets that you have gifted away within the last 5 years, whether to an individual or a trust, is back on the table for purposes of the spend down before you qualify for Medicaid. This is why they call these trusts a Medicaid Trust.

Medicaid Will Put A Lien Against The House

Now, your primary resident is not an asset subject to the Medicaid spend down. If your only asset is your house and you have spent down all of your other assets that are not in an IRA or qualified retirement plan, you can qualify for Medicaid immediately. So why put the house in an irrevocable trust then? While Medicaid cannot make you sell your primary residence or count it as an asset for the spend down, Medicaid will put a lien against your estate for the amount they pay for your care. So when you pass away, your house does not go to your children or heirs, Medicaid assumes ownership, and will sell it to recoup the cash that they paid out for your care. Not a great outcome. Most people would prefer that the value of their house go to their kids instead of Medicaid.

If you transfer the ownership of the house to an Irrevocable Trust, you can live in the house for the rest of your life, and as long as the house has been in the trust for more than 5 years, it’s not a spend down asset for Medicaid and Medicaid cannot place a lien against your house for the money that they pay out for your care.

So if you are age 65 or older or have parents that are 65 or older, in many cases it makes sense for that individual to setup an irrevocable trust, transfer the ownership of the house to the trust, and start the 5 year clock for the Medicaid look back period. Once you have satisfied the 5 year period, you are free and clear.

Frequently Asked Questions

When I meet with clients about this, there are usually a number of other questions that come up when we talk about placing the house in a trust. Here are the most common:

If my house is in a trust, do I still qualify for the STAR and Enhanced STAR property tax exemption?

ANSWER: Yes

If my house is gifted to a trust, do my beneficiaries still receive a step-up in basis when they inherit the asset?

ANSWER: As long as the estate attorney put the appropriate language in your trust document, the house will receive a step up in basis at your death.

What if I want to sell my house down the road but it’s owned by the trust?

ANSWER: It depends on what type of trust owns your house and the language in your trust document. When you sell your primary residence, as a single tax filer you do not have pay tax on the first $250,000 of capital gain in the property. For married filers, the number is $500,000. Example, married couple bought their house in 1980 for $40,000, it’s now worth $400,000, which equals $360,000 in appreciation or gain in value. When they sell their house, they do not pay any tax on the gain because it’s below the $500,000 exclusion.

If a revocable trust owns your house, you retain these tax exclusions because you technically still own the house. If an irrevocable trust owns your house, depending on the type of irrevocable trust you establish and the language in your trust document, you may or may not be able to utilize these exclusions.

Many of the irrevocable trust that we see drafted by estate attorneys that exist for the purpose of avoiding probate and protecting asset from Medicaid are considered grantor trusts. The estate attorney will often put language in the document that protects the assets from Medicaid but allows the grantor to capture the primary residence capital gains exclusion if they sell their house at some point in the future. But this is not always the case. If you establish an irrevocable trust for your primary residence, it’s important to have this discussion with your estate attorney to make sure this specific item is addressed in your trust document.

Now, here is the most common mistake that we see people make when they sell their house that is owned by their irrevocable trust. You put your primary residence in an irrevocable trust six years ago so you are now free and clear on the five year look back period. You decided to sell your current house and buy another house or sell your house and put the cash in the bank. At the closing the buyers make the check payable to you instead of your trust. You deposit the check to your checking account and then move it into the trust account or issue the check to purchase your next house. Guess what? The 5 year clock just restarted. The money can never leave the trust. If your intention is to sell one house and buy another house, at the closing they should make the check payable to your trust, and the trust buys your next house.

Does the trust need to file a tax return?

ANSWER: Only irrevocable trusts have to file tax returns because revocable trusts are built under the social security number of the grantor. However, if the only asset that the irrevocable trust owns is your primary residence, the trust would not have any income, so there would not be a need to file a tax return for the trust each year.

Are irrevocable trusts 100% irrevocable?

ANSWER: There are tricks that estate attorneys use to get around the irrevocable restriction of these trusts. For example, the trust could make a gift to the beneficiaries of the trust and then the beneficiaries turn around and gift the money back to the grantor of the trust. Grantors can also retain the right to change who the trustees are, the beneficiaries, and they can revoke the trust. Bottom line, if you really need to get to the money, there are usually ways to do it.

How To Establish A Trust

You will need to retain an estate attorney to draft and execute your trust document. For a simple revocable or irrevocable trust, it may cost anywhere from $2,500 – $5,500. Before people get scared away by this cost, I remind them that if their house is subject to probate their estate may have to pay attorney fees, accountant fees, appraisal fees, and executor commissions which can easily total more than that.

In the case of a long-term care event, I just ask clients the question “Do you want your kids to inherit your house that you worked hard for or do you want Medicaid to take it if a long-term care event occurs down the road?” Most people reply, “I want my kids to have it.” Putting the house in an irrevocable trust for 5 years assures that they will.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Medicaid Spend Down Process In New York

You are most likely reading this article because you had a family member who had a health event, and the doctors have informed you that they are not allowed to go back home to their house and will need some form of health assistance going forward.  This article was written to help you understand, from a high level, the steps that you may need to take to get them the care that they need and to get a preview of the Medicaid application process and the spend-down process, if that’s the path that needs to be taken.

Everyone is living longer, which is a good thing, but it creates more complications later in life. It is becoming much more common that people have family members who have a health event in their 80s or 90s that renders them unable to continue to live independently. Without advance planning, a lot of the important decisions then have to be made by family and friends, so it is important for even younger individuals to understand how the process works because you may be in this situation some day for a loved one.

Do I Have To Apply For Medicaid To Pay For Their Care?

What you will find out very quickly is any type of care whether it's home health care, assisted living, or a nursing home, is very expensive. Very few individuals have the assets and the income to enable them to pay out of pocket for their care without going broke. It's not uncommon for kids or family members to have no idea what mom or dad's income and asset picture looks like. But no one is going to provide you with this information unless you have a power of attorney.

Power of Attorney, Health Proxy, and Will

A power of attorney (“POA”) is a document that allows you to step into the shoes of a person who has been incapacitated. It allows you to get information on their bank accounts, investments, insurance policies, and anything else financial. If you do not have a power of attorney, you need to get one quickly.  A lot of financial decisions will most likely need to be made in a very short period of time. You will need to contact an estate attorney to draft the power of attorney. There are some choices that you will have to make when you draft the documents as to what powers the “POA” will have. They can usually be turned around by an attorney in 48 hours if needed.

While you have the estate attorney on the phone, you also will want to make sure that they have a health proxy and a will. The health proxy allows you to make health decisions for a family member if they are unable to do so. While it’s difficult to think about, health proxies will typically list out the end-of-life decisions. For example, a health proxy may state that mom or dad refuses to have a machine breathe for them if they are no longer able to breathe on their own. The questions are tough to answer, but it’s very important to have this document in place.

Home Care, Assisted Living, or Nursing Home

Prior to the health event, mom or dad may have been living by themselves at their house. Now the doctor is telling them that because of the damage done by the stroke, that they will not release them from the hospital until other arrangements are made for their care. There are three options to receive care:

• Receiving care in the home via home care by health aids

• Assisted living facility

• Nursing home facility

People that cannot pay for 100% of their care and that do not have a long term care insurance policy, typically have to spend down their personal assets and then apply for Medicaid.  Now that is said, let's jump right into what is protected and not protected as far as income and assets for Medicaid.

Different Rules For Different States

Each state has different eligibility and spends down rules when it comes to Medicaid. For purposes of this article, we will assume that the person needing the care is a resident of New York. If you live in a different state, the process will be similar but the actual amounts and the definition of "protected" assets may be different. It's usually best to work with a Medicaid planner, estate attorney, or local social services office that is located within your state/county to obtain the rules for your family member that needs care.

The Medicaid Rules In New York

There are different limits based on whether the family member needing care is married and their spouse is still alive or if they are single or widowed. In general, if a couple is married and one spouse needs care, more assets and income will be able to be protected and they will be able to qualify for Medicaid because they recognize that income and assets have to be available to support the spouse that does not need the care. But for purposes of this article, we will assume that mom passed away and dad now needs care.

Asset Limit

In 2025, to qualify for Medicaid, an individual is only allowed to keep $32,396 in assets. The next question I get is "what counts toward that number?" It's actually easier to explain what DOES NOT count toward that number. The only assets that do not count toward that threshold are as follows:

• Primary Residence

• 1 Vehicle

• Pre-Tax Retirement Accounts (if older than age 70½) - (However Required Minimum Distribution goes toward care)

• Irrevocable Trust (Funded at least 5 years ago)

• Pre-paid burial expenses

That's it. If Dad has $50,000 in his checking account, $20,000 in a Roth IRA, and an RV, the RV will need to be sold, and he will need to spend down the Roth IRA and the checking account until the balance reaches $32,396  in order to apply for Medicaid.

Primary Residence

Very important, while the primary residence is a protected asset for purposes of the Medicaid application, Medicaid will place a lien against dad’s estate for the money that they paid on his behalf. Meaning when he passes away, the kids do not automatically get the house. Medicaid will be first in line after the house is sold waiting to get paid. The amount depends on how much Medicaid paid out. If dad lives in a house that is worth $200,000 and Medicaid during his lifetime paid out $120,000 for his care, when the house sells, Medicaid will get $120,000 and the beneficiaries of the estate will only get the remaining $80,000.

When kids hear this, they typically get upset because mom and dad worked their whole life to pay off the mortgage and maintain the house, and now they are going to lose it to Medicaid. Is there anything that can be done to protect it? If the house was not put into a Medicaid Trust 5 years before needing to qualify for Medicaid, then no, there is nothing that can be done. That’s why advanced planning is so important.

If dad worked with an estate attorney to establish a Medicaid trust 5 years ago, the attorney could have changed the ownership of the house to the trust, once dad makes it by 5 years without a health event, it’s no longer a countable asset for Medicaid and Medicaid cannot place a lien against the house. The question I usually ask our clients is, “Do you want Medicaid to get your house, or do you want your kids to have it?” Most people say their kids but if advanced planning was not completed, you lose this options.

No Gifts To Kids

So what if you change the name on the house to the kids? It's considered a "gift". All gifts made within the last five years are a countable assets. It's called the "5-year look back period". When you apply for Medicaid for your dad, you have to provide them with a ton of information, including 5 years of all statements for bank accounts and investment accounts. Also, you have to provide them with copies of all checks written over the past 5 years that were in excess of $1,000. Medicaid is making sure that you did not "give" all of Dad's assets away last minute so he could qualify for Medicaid and avoid the spend down.

Income Limits

We have talked about assets but what about income? It's not uncommon for a parent to be receiving a pension and/or social security. They are only allowed to keep $1,800 per month in 2025. The rest of their income will be applied toward their care. This can create some tough decisions if dad has to go to assisted living or a nursing home and the family has to maintain the house and meet his financial needs on $1,800 per month. Again, Medicaid is trying to recoup as much as it can to pay for dad's care.

Medicaid Pooled Trust

There are ways to protect income above the $1,800 threshold through the use of a Medicaid Pooled Trust. Unlike the Medical Irrevocable Trust to protect assets that needs to be established 5 years prior, these trusts can be establish now to protect more income. They work like a special checking account that can only be used to pay bills in dad's name. You can never withdraw cash out of the accounts. As long as dad is considered "disabled" by the social security administration or NYS he may qualify to setup this trust. There are not-for-profit entities that administer this income trust. Basically his income from social security and pension would be deposited to this trust account and then when bills show up for utilities, property taxes, car payment, etc, you submit the bill to the organization that is administering the trust and they pay the bill on behalf of that individual.

Home Care Limitation

Most individuals want to return to their home and have the care provided at their house via home health aids.  This may or may not be an option. It all depends on the level of care needed. If Medicaid will be paying for dad's care, you will need to call the social services office in the county that he lives in. They will send an "assessor" to his house to determine if the living conditions are adequate for home care and they will also determine the level of care that is needed. In general, if the estimated cost of home care is expected to be at least 90% of what it would cost for care at a facility, Medicaid will not pay for home care and will require them to go to an assisted living or nursing home facility.Home health aids typically range in price from $15 - $30 per hour. Assume it cost $25 per hour, if dad needs care 8 hours a day, 7 days a week that would cost $6,083 per month. If you need a nurse or registered nurse to administer medication at the home, you are looking at $40+ per hour for those services.

Steps From Start To Finish

We have covered a lot of ground and this is just a general overview. But here is a general list of the steps that need to be taken assuming dad had a health event and you need to apply for Medicaid on his behalf:

• Contact an estate attorney to establish a power of attorney and requirement for Medicaid application

• Using the POA, begin collecting financial information for the Medicaid process

• Contact the county social services office to request an assessment to determine if home care will be an option if it's in question

• If a spend down is required to qualify for Medicaid, work with estate attorney to develop spend down strategy

• If monthly income is above threshold, determine if a Medicaid pooled trust is an option

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Spouse Inherited IRA Options

If your spouse passes away and they had either an IRA, 401(k), 403(b), or some other type of employer sponsored retirement account, you will have to determine which distribution option is the right one for you.   There are deadlines that you will need to be aware of, different tax implications based on the option that you choose, forms that need to be completed, and accounts that may need to be established. 

Spouse Distribution Options

As the spouse, if you are listed as primary beneficiary on a retirement account or IRA, you have more options available to you than a non-spouse beneficiary.  Non-spouse beneficiaries that inherited retirement accounts after December 31, 2019 are required to fully distribution the account 10 years following the year that the decedent passed away. But as the spouse of the decedent, you have the following options: 

• Fulling distribute the retirement account with 10 years

• Rollover the balance to an inherited IRA

• Rollover the balance to your own IRA

To determine which option is the right choice, you will need to take the following factors into consideration: 

• Your age

• The age of your spouse

• Will you need to take money from the IRA to supplement your income?

• Taxes

Cash Distributions

We will start with the most basic option which is to take a cash distribution directly from your spouse’s retirement account.    Be very careful with this option.  When you take a cash distribution from a pre-tax retirement account, you will have to pay income tax on the amount that is distributed to you.  For example, if your spouse had $50,000 in a 401(k), and you decide to take the full amount out in the form of a lump sum distribution, the full $50,000 will be counted as taxable income to you in the year that the distribution takes place. It’s like receiving a paycheck from your employer for $50,000 with no taxes taken out.   When you go to file your taxes the following year, a big tax bill will probably be waiting for you.

In most cases, if you need some or all of the cash from a 401(k) account or an IRA, it usually makes more sense to first rollover the entire balance into an inherited IRA, and then take the cash that you need from there.   This strategy gives you more control over the timing of the distributions which may help you to save some money in taxes.  If as the spouse, you need the $50,000, but you really need $30,000 now and $20,000 in 6 months, you can rollover the full $50,000 balance to the inherited IRA, take $30,000 from the IRA this year, and take the additional $20,000 on January 2nd the following year so it spreads the tax liability between two tax years.

10% Early Withdrawal Penalty

Typically, if you are under the age of 59½, and you take a distribution from a retirement account, you incur not only taxes but also a 10% early withdrawal penalty on the amount this is distributed from the account.  This is not the case when you take a cash distribution, as a beneficiary, directly from the decedents retirement account.  You have to report the distribution as taxable income but you do not incur the 10% early withdrawal penalty, regardless of your age. 

IRA Options

Let's move onto the two IRA options that are available to spouse beneficiaries.  The spouse has the decide whether to: 

• Rollover the balance into their own IRA

• Rollover the balance into an inherited IRA

By processing a direct rollover to an IRA in either case, the beneficiary is able to avoid immediate taxation on the balance in the account.  However, it’s very important to understand the difference between these two options because all too often this is where the surviving spouse makes the wrong decision.  In most cases, once this decision is made, it cannot be reversed. 

Spouse IRA vs Inherited IRA

There are some big differences comparing the spouse IRA and inherited IRA option.

There is common misunderstanding of the RMD rules when it comes to inherited IRA’s.  The spouse often assumes that if they select the inherited IRA option, they will be forced to take a required minimum distribution from the account just like non-spouse beneficiaries had to under the old inherited IRA rules prior to the passing of the SECURE Act in 2019. That is not necessarily true.  When the spouses establishes an inherited IRA, a RMD is only required when the deceases spouse would have reached age 70½.  This determination is based on the age that your spouse would have been if they were still alive.  If they are under that “would be” age, the surviving spouse is not required to take an RMD from the inherited IRA for that tax year.

For example, if you are 39 and your spouse passed away last year at the age of 41, if you establish an inherited IRA, you would not be required to take an RMD from your inherited IRA for 29 years which is when your spouse would have turned age 70½.   In the next section, I will explain why this matters.

Surviving Spouse Under The Age of 59½

As the surviving spouse, if you are under that age of 59½, the decision between either establishing an inherited IRA or rolling over the balance into your own IRA is extremely important.  Here’s why .

If you rollover the balance to your own IRA and you need to take a distribution from that account prior to reaching age 59½, you will incur both taxes and the 10% early withdrawal penalty on the amount of the distribution.

But wait…….I thought you said the 10% early withdrawal penalty does not apply?

The 10% early withdrawal penalty does not apply for distributions from an “inherited IRA” or for distributions to a beneficiary directly from the decedents retirement account.  However, since you moved the balance into your own IRA,  you have essentially forfeited the ability to avoid the 10% early withdrawal penalty for distributions taken before age 59½.

The Switch Strategy

There is also a little know “switch strategy” for the surviving spouse.  Even if you initially elect to rollover the balance to an inherited IRA to maintain the ability to take penalty free withdrawals prior to age 59½, at any time, you can elect to rollover that inherited IRA balance into your own IRA.

Why would you do this?  If there is a big age gap between you and your spouse, you may decide to transition your inherited IRA to your own IRA prior to age 59½.  Example, let’s assume the age gap between you and your spouse was 15 years.  In the year that you turn age 55, your spouse would have turned age 70½.  If the balance remains in the inherited IRA, as the spouse, you would have to take an RMD for that tax year.   If you do not need the additional income, you can choose to rollover the balance from your inherited IRA to your own IRA and you will avoid the RMD requirement.   However, in doing so, you also lose the ability to take withdrawals from the IRA without the 10% early withdrawal penalty between ages 55 to 59½.  Based on your financial situation, you will have to determine whether or not the “switch strategy” makes sense for you.

The Spousal IRA

So when does it make sense to rollover your spouse’s IRA or retirement account into your own IRA?  There are two scenarios where this may be the right solution:

• The surviving spouse is already age 59½ or older

• The surviving spouse is under the age of 59½ but they know with 100% certainty that they will not have to access the IRA assets prior to reaching age 59½

If the surviving spouse is already 59½ or older, they do not have to worry about the 10% early withdrawal penalty.

For the second scenarios, even though this may be a valid reason, it begs the question:  “If you are under the age of 59½ and you have the option of changing the inherited IRA to your own IRA at any time, why take the risk?”

As the spouse you can switch from inherited IRA to your own IRA but you are not allowed to switch from your own IRA to an inherited IRA down the road.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

How Are Trustee Commissions Calculated & Taxed?

If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets.  States have different rules with regard to the trustee commission calculation.  This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how the trust commissions are split between multiple trustees. 

Trust Document

The trust document usually has a special section that addresses commissions paid to the trustee.  It’s common for the trust document to include language that states that “the trustee shall receive annual commissions in the same manner and at the same rates as prescribed for testamentary trustees under the laws of the State of (Name of State)”.

For New York the formula is as follows:

1.05% of the first $400,000

0.45% of the next $600,000

0.30% of the rest

For example, a trust has $500,000 in assets as of December 31st, the calculation would be as follows:

$400,000 x 1.05% =          $4,200

$100,000 x 0.45% =          $   450

Total Commission:           $4,650

The trustee would be eligible to receive $4,650 from the trustee assets as their commission for the year.

How Are Commissions Taxed?

Commissions paid by the trust to the trustee are reported as income by the trustee on their personal tax return.  The trust deducts the commission paid as an expense.  We frequently receive the question, “does the trust have to issue a 1099-MISC tax form for the commission that was paid to the trustee?”    Many tax professionals take the position that a 1099-MISC is not required to be issued because serving as trustee does not meet the definition of a “trade or business” which is the prerequisite for issuing a 1099-MISC tax form. 

More Than 1 Trustee

What happens where there is more than 1 trustee?  Do the trustees have to split the commission equally?  The answer is “it depends”.   It depends on the size of the trust and the number of trustees.

Again, I’m referencing New York State law her.  The rules will vary for by state.  For trusts with under $100,000 in assets, each trustee gets the full commission.  If a trust has $80,000 in assets and there are 3 trustees, each trustee would receive $840 ($80,000 x 1.05%).

For trusts with assets between $100,000 – $400,000, if there are one or two trustees, each trustee is entitled to a full commission.  If there are 3 or more trustees within this asset range, the single trustee commission is divided equally between the trustees.  I don’t necessary understand the logic behind if there are two trustees the commission is doubled but if there are 3 trustees, a single commission payment is split between the trustees.  But that’s how the law is written.

For trusts with more than $400,000 in assets, if there are 1 – 3 trustees, each trustee is entitled to the full commission amount.  If there are more than 3 trustees, again, the commission is split equally amongst the trustees.

Can You Waive The Commission Payment?

As the trustee, you can voluntarily waive the commission payment.  The money simply remains in the trust.  Why would a trustee do this?  Some trustees just don’t need the income. In some situations, the parents will setup a trust, they have more than one child, but only one of the children serves as trustee.   The child that serves as trustee may decide to waive the commission payment to avoid conflict with their siblings about “taking money from mom and dad’s trust”.

Another reason for waiving the commission payment is the trustee may purposefully want to realize that income at a later date.  Whatever the reason, I just wanted you to know that waiving the commission payment is an option.

Back Payments

We will frequently get the following question:

“I have been the trustee of this trust for the past 10 year but I have never taken a commission.  Am I still entitled to the trustee commissions for past 10 years even though I did not take them?”

The answer is “yes”.  The trustee is still entitled to receive those commissions for past years even though they did not take them in the year that they were due.   The trustee would just need to be able to produce the records necessary to calculation the trustee commission for all of the past years.

In these cases, remember, commission payments to the trustees are taxed at ordinary income tax rates to the trustee. If you decide to “catch-up” on past commissions that are due to you and you receive $30,000 in trustee commissions in a single tax year that could bump you up into a higher tax bracket.  It may make more sense from a tax standpoint to spread those past commission payments over the course of the next few years to reduce the tax hit.

Disclosure: This article is for educational purposes only. For legal advice, please consult an attorney. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Do Trusts Expire?

Do trusts have an expiration date after the death of the grantor?  For most states, the answer is “Yes”.  New York is one of those states that have adopted “The Rule Against Perpetuities” which requires all of the assets to be distributed from the trust by a specified date.

The Rule Against Perpetuities

For most states, the trust assets have to be distributed no later than the “lifetime of those then living plus 21 years.”   In other words, the trust asset must be distributed 21 years after the death of the youngest beneficiary listed in the trust document.   For example, if I setup a trust with my children listed as beneficiaries, after my passing the trust assets would have to be distributed no later than 21 years following the death of my youngest child.

Per Stirpes Beneficiaries

Some trust documents have the children listed as beneficiaries “per stirpes”.  This mean that if a child is no longer alive their share of the trust passes to their heirs.  In many cases their children.  If the beneficiaries are listed in the trust document as per stirpes beneficiaries then you may be able to make the argument that the “youngest beneficiary” is really the grandchildren not the children which will allow the trust to retain the assets for a longer period of time.  Typically trusts do not allow the perpetuity rule to extend beyond their grandchildren.

Consult An Estate Attorney

Trust can be tricky and the language in a trust document is not always black and white,  so it’s highly recommended that you consult with an estate attorney that is familiar with the estate laws for you state of residence and can review the terms of the trust document.DISCLOSURE:  The information listed above is not legal advice. For legal advice, please consult your attorney. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Should I Establish A Power of Attorney?

There are three key estate documents that everyone should have: 

• Will

• Health Proxy

• Power of Attorney

If you have dependents, such as a spouse or children, the statement above graduates from “should have” to “need to have in place.”  The power of attorney document allows someone that you designate to act on your behalf if you are rendered incapacitated such as a car accident, illness, or as you become become more frail later in life.

What happens if I'm in a car accident?

If I have a wife and kids and one day I end up in a car accident and end up in a coma, without a power of attorney in place, not even my wife would be able to access accounts that are solely in my name such as bank accounts, retirement accounts, or creditors.   It could put my family in a very difficult situation if my wife is unable to access certain accounts to pay bills or withdraw money to pay for my medical bills while I am recovering.  If I establish a Power of Attorney with my wife listed as the POA (Power of Attorney), if I become incapacitated, she can use that document to access all of my accounts as if she were me.

Protecting Against Long Term Care Event

While this a valid example, the Power of Attorney document is more frequently used when elderly individuals experience a long term care event and they are no longer able to manage their finances.  The POA gives the designated person the power to make gifts, setup trusts, or implement other wealth preservation strategies to prevent the total depletion of your assets due to the expenses associated with the long term care event.

What happens if you don’t have a power of attorney?

From working with individuals that have been in these situations, it’s ugly.  Very ugly.  Instead of a trusted person being able to step in and act on your behalf, without a POA your family or friends would need to initiate a guardianship proceeding, wherein the individual is declared incapacitated and a guardian is appointed by the court to manage their financial affairs. The largest drawback of a guardianship proceeding is time and money.  It can often times cost more that $15,000 to complete a guardianship processing when taking into account court fees, attorney fees, court evaluations, and bonding fees.  In addition and arguably more importantly, you have no control over who the court will decide to appoint as your guardian and that individual will have full control over your finances.   You know your family and friends best.  Ask yourself this, wouldn’t you prefer to appoint the individual that you trust to carry out your wishes?  If the answer is “yes”, then you should strongly consider putting a power of attorney in place. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Planning for Long Term Care

The number of conversations that we are having with our clients about planning for long term care is increasing exponentially.  Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.

The baby-boomer generation is the first generation that on a large scale is seeing the ugly aftermath of not having a plan in place to address a long term care event because they are now caring for their aging parents that are in their 80’s and 90’s.  Advances in healthcare have allowed us to live longer but the longer we live the more frail we become later in life.

Our clients typically present the following scenario to us: “I have been taking care of my parents for the past three years and we just had to move my dad into the nursing home.  What an awful process.  How can I make sure that my kids don’t have to go through that same awful experience when I’m my parents age?”

“Planning for long term care is not just about money…….it’s about having a plan”

If there are no plans, your kids or family members are now responsible for trying to figure out “what mom or dad would have wanted”.   Now tough decisions need to be made that can poison a relationship between siblings or family members.

Some individuals never create a plan because it involves tough personal decisions.  We have to face the reality that at some point in our lives we are going to get older and later in life we may reach a threshold that we may need help from someone else to care for ourselves or our spouse.  It’s a tough reality to  face but not facing this reality will most likely result in the worst possible outcome if it happens.

Ask yourself this question: “You worked hard all of your life to buy a house, accumulate assets in retirement accounts, etc. If there are assets left over upon your death, would you prefer that those assets go to your kids or to the nursing home?”  With some advance planning, you can make sure that your assets are preserved for your heirs.

The most common reason that causes individuals to avoid putting a plan in place is: “I have heard that long term care insurance is too expensive.”  I have good news.  First, there are other ways to plan for the cost of a long term care event besides using long term care insurance.  Second, there are ways to significantly reduce the cost of these policies if designed correctly.

The most common solution is to buy a long term care insurance policy.  The way these policies work is if you can no longer perform certain daily functions, the policy pays a set daily benefit.  Now a big mistake many people make is when they hear “long term care” they think “nursing home”.  In reality, about 80% of long term care is provided right in the home via home health aids and nurses.  Most LTC policies cover both types of care.   Buying a LTC policy is one of the most effective ways to address this risk but it’s not the only one.

Why does long term care insurance cost more than term life insurance or disability insurance? The answer, most insurance policies insure you against risks that have a low probability of happening but has a high financial impact.  Similar to a life insurance policy. There is a very low probability that a 25 year old will die before the age of 60.  However, the risk of long term care has a high probability of happening and a high financial impact.  According to a study conducted by the U.S Department of Human Health and Services, “more than 70% of Americans over the age of 65 will need long-term care services at some point in their lives”.  Meaning, there is a high probability that at some point that insurance policy is going to pay out and the dollars are large.  The average daily rate of a nursing home in upstate New York is around $325 per day ($118,625 per year). The cost of home health care ranges greatly but is probably around half that amount.

So what are some of the alternatives besides using long term care insurance?  The strategy here is to protect your assets from Medicaid.  If you have a long term care event you will be required to spend down all of your assets until you reach the Medicaid asset allowance threshold (approx. $13,000 in assets) before Medicaid will start picking up the tab for your care.  Often times we will advise clients to use trusts or gifting strategies to assist them in protecting their assets but this has to be done well in advance of the long term care event.  Medicaid has a 5 year look back period which looks at your full 5 year financial history which includes tax returns, bank statements, retirement accounts, etc, to determine if any assets were “given away” within the last 5 years that would need to come back on the table before Medicaid will begin picking up the cost of an individuals long term care costs.  A big myth is that Medicare covers the cost of long term care.  False, Medicare only covers 100 days following a hospitalization.  There are a lot of ins and outs associated with buildings a plan to address the risk of long term care outside of using insurance so it is strongly advised that individuals work with professionals that are well versed in this subject matter when drafting a plan.

An option that is rising in popularity is “semi self-insuring”.  Instead of buying a long term care policy that has a $325 per day benefit, an individual can obtain a policy that covers $200 per day.  This can dramatically reduce the cost of the LTC policy because it represents less financial risk to the insurance company.  You have essentially self insured for a portion of that future risk.  The policy will still payout $73,000 per year and the individual will be on the line for $45,625 out of pocket.  Versus not having a policy at all and the individual is out of pocket $118,000 in a single year to cover that $325 per day cost.

As you can see there are a number of different options when it come to planning for long term care.  It’s about understanding your options and determining which solution is right for your personal financial situation.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Do I Have To Pay Taxes On My Inheritance?

Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”?  Believe it or not, money you receive from an inheritance is likely not taxable income to you.

Of course there are some caveats to this.  If the inherited money is from an estate, there is a chance the money received was already taxed at the estate level.  The current federal estate exclusion is $5,430,000 (estate taxes and the exclusion amount varies for states). Therefore, if the estate was large enough, a portion of the inheritance may have been subject to estate tax which is 40% in most cases.  That being said, whether the money was or was not taxed at the estate level, you as an individual do not have to pay income taxes on the money.

Although the inheritance itself is not taxable, you may end up paying taxes if there is appreciation after the money is inherited.  The type of account and distribution will dictate how the income will be taxed.

Basis Of Inherited Property

Typically, the basis of inherited property is the fair market value of the property on the date of the decedent’s death or the fair market value of the property on the alternate valuation date if the estate uses the alternate valuation date for valuing assets.  An estate will choose to value assets on an alternate date subsequent to the date of death if certain assets, such as stocks, have depreciated since the date of death and the estate would pay less tax using the alternate date.

What the fair market value basis means is that if you inherit stock that was originally purchased for $500 and at the date of death has appreciated to $10,000, you will have a “step-up” basis of $10,000.  If you turn around and sell the stock for $11,000, you will have a $1,000 gain and if you sell the stock for $9,000, you will have a $1,000 loss.

Inheriting a personal residence also provides for a step-up in basis but the gain or loss may be treated differently.  If no one lives in the inherited home after the date of death, it will be treated similar to the stock example above.  If you move into the home after death, any subsequent sale at a loss will not be deductible as it will be treated as your personal asset but a gain would have to be recognized and possibly taxed.  If you rent the property subsequent to inheritance, it could be treated as a trade or business which would be treated differently for tax purposes.

Inheriting An IRA or Retirement Plan Account

Please read our article “Inherited IRA’s: How Do They Work” for a more detailed explanation of the three different types of distribution options.

When you inherit a retirement account, and you are not the spouse of the decedent, in most cases you will only have one option, fully distribute the account balance 10 years following the year of the decedents death.   The SECURE Act that was passed in December 2019 dramatically change the distribution options available to non-spouse beneficiaries. See the article below: 

If you are the spouse of the of the decedent, you are able to treat the retirement account as if it was yours and not be forced to take one of the options above.  You will have to pay taxes on distributions but you do not have to start withdrawing funds immediately unless there are required minimum distributions needed.

Note: If the inherited account was an after tax account (i.e. Roth), the inheritor must choose one of the options presented above but no tax will be paid on distributions. 

Non-Qualified Annuities

Non-qualified annuities are an exception to the step-up in basis rule.  The non-spousal inheritor of a non-qualified annuity will have to take either a lump sum or receive payments over a specified time period.  If the inheritor chooses a lump sum, the portion that represents the gain (lump sum balance minus decedent’s contributions) will be taxed as ordinary income.  If the inheritor chooses a series of payments, distributions will be treated as last in, first out.  Last in, first out means that the appreciation will be distributed first and fully taxable until there is only basis left.

If the spouse inherits the annuity, they most likely have the option to treat the annuity contract as if they were the original owner.

This article concentrated on inheritance at a federal level.  There is no inheritance tax at a federal level but some states do have an inheritance tax and therefore meeting with a professional is recommended.  New York currently does not have an inheritance tax. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.