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We are selling the home my parents have lived in for over 40 years. Not thier first home. we will clear about 230,ooo. Mom is stressed about how much taxes they will owe (home in Pa, now living with us in MD) Someone told me they can still avoid heavy taxes on this due to thier age and length of time in home. Any advice?
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...thanks Ralph for the clarification. This type of planning needs to be thought of well in advance - especially for protection of assets.

I am also glad you mentioned "catching" all assets and deciding whether they should be in the trust or not. For example, one could place most of their assets under a trust, but leave a personal checking account outside of the trust.

My personal view is that trusts protect vulnerable seniors from the hands of those who wish to "separate" them from their income.

Ralph, could you please address the following:
1. Can assets be held in the trust after a grantor has passed? My mother has concerns about my sib's spouse. She wishes that assets be passed directly to my sib. Can she make this designation?
2. How does the trustee disperse assets from the trust after the death of the grantor? Is there any "paperwork" that needs to be done?

Thanks again,
Lilli
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Living Trusts...aka Revocable Living Trusts can be an effective tool however I find that when it comes to eldercare planning later in life they may cause more headaches than help.

A revocable trust (as opposed to an irrevocable trust) is a flexible instrument. Because it is revocable, i.e., the terms of the trust can be changed by the grantor, it is treated, from a public benefit eligibility standpoint, the same as any other personal asset.

The concept is that since it is revocable, the grantor has full power to control trust assets including paying for their own care. Since the trust is treated as a personal asset there is no "five year look back" or resulting penalty when an individual transfers assets to a revocable trust they have created (self settled).

If the trust were irrevocable the grantor would be giving up all control of the assets in the trust and the trust provisions cannot be changed. In this instance the five year look back would apply; the idea being that one creating and funding such a trust may be doing so to shed assets to qualify for public benefits.

Why then, do people create living trusts? There are several main reasons:

1. To avoid probate. Assets titled in a revocable trust will be devised by the terms of the trust; not by will. Probate time and cost are therefore avoided.

2. Incapacity. The trust permits the grantor to be their own trustee. In the event they are unable to do so due to incapacity, such trusts usually have provisions for successor trustees to step in and administer the trust thus avoiding potential guardianship proceedings.

3. Succession. Trust terms can provide testamentary (death) provisons that restrict when and how beneficiaries can receive funds; particularly helpful where grandchildren or spendthrift children are beneficiaries.

This being said, there are other ways to accomplish the same thing that may be less cumbersome.

1. Naming beneficiaries. Many assets permit beneficiaries to be named. You can name beneficiaries to bank accounts, IRA's, brokerage accounts, annuities, and life insurance policies. When a beneficiary is named to an asset, that asset will devise directly to the beneficiary and therefore avoid probate.

2. Power of Attorney. Whether "springing" (effective when the principal becomes incompetent) or "durable" (effective at signing and "durable" through incompetency), a power of attorney gives the attorney-in-fact the ability to have authority over assets and transactions enumerated in the document. This is just as effective as being a "successor trustee" but less cumbersome.

It is amazing but I would say easily 95% of those I counsel who have revocable living trusts have not titled all appropriate assets in the name of the trust thereby nullifying all the planning they have done! Keep it simple if your situation is simple.

By the way, just a small correction to information above...As I mentioned, only assets titled in the name of the trust are subject to the terms of the trust. When establishing a trust I also have drafted what is known as a "pour-over will". This will is designed to catch and then devise those assets that are not titled in the trust such as personal effects, etc. or those assets that should have been so titled but weren't as described above.

The trust and the will are separate and distinct. The executor of a will has no authority over trust assests unless they are also a successor trustee.
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I believe the trusts also have a 5 yr. look back period that was what we were told many years ago Mr. Robbins could you address this for us.
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First of all thank you Ralph Robbins...your posts are always so informative and helpful.
When my Mom sold her home her tax advisor suggested creating a "living trust" to protect her assets. As Ralph mentioned she should not have a tax liablity for the sale of her home (I believe that is if this is the first home she has sold.) Once inside the trust the funds can be invested. The safest (and FDIC insured) is what Ralph suggested above. "Laddering" your CDs also gives you access to funds in emergency because one will always be maturing soon. When you form a trust, your Mom will have to appoint a "trustee." The trustee makes all the decisions concerning funds inside the trust, although, ultimately a will would provide instructions to the trustee in the event of a death.
You also need to consider whether your Mother would need Medicaid services in the future. There is currently a 5-year "look back" period on all assets. I think the trust protects these assets.
Ralph is this correct?
Lilli
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There should be no tax consequence to the sale of the home which means that all of the money can be put to work. Assuming she is not currently receiving Medicaid benefits she can do with the funds as she pleases.

If the goal is "retirement" please be aware that there are thousands of "investment professionals" that would love to get a hold of her money.

These days, the "investment du jour", in other words the "investment" that pays the highest commission and therefore is being agressively sold to seniors is the "Equity-Indexed Annuity".

Whatever you do DO NOT LET HER PURCHASE ONE OF THESE ANNUITIES! I do not have the time to go into details here but suffice to say state after state has received thousands of complaints from consumers about these product.

My suggestion is that you "ladder" CD's at the bank. The concept is this: Take the $40k and divide it into 5, $8k pieces. Take $8k and buy a 1 yr or 2 yr CD. Take the next $8k and purchase a 2 yr or 3 yr CD. Take the next $8k and purchase a 3 or 4 yr CD, etc.

This will...

1. Keep mom's money as safe as possible.

2. Provide a higher yield than just purchasing a short term CD with all of the funds

3. Provide "fresh" money each year from an expiring CD to purchase a new CD at the then current rate. (Rates will most likely be going higher over the next few years, we can't stay at zero forever, can we?).

4. Provide liquidity in the event she needs money some will always be available with very little penalty.

DO NOT buy stocks for obvious reasons.
DO NOT buy bond mutual funds. When interest rates go up the value of the funds will be CRUSHED.
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