The Greatest Gift: Protecting Your Home for Your Heirs with a Trust

As the year winds down and families gather, our thoughts often turn to legacy, especially when it involves the place that holds all those memories: your home. For most of our clients in West Hartford, across Connecticut, and in Massachusetts, their home is their most valuable and most cherished asset. Naturally, they want to ensure it passes smoothly, quickly, and tax-efficiently to the next generation.

Think of placing your home into a trust as delivering the ultimate, perfectly wrapped gift to your heirs. It’s a legal strategy that serves two major purposes: it keeps the home out of the public, time-consuming probate court process, and it allows you to set clear rules for how the home will be used, managed and inherited after you are gone.

At Franklin & Frankel, we commonly use two different types of trusts to accomplish this, depending on your primary goal:

Option 1: The Revocable (Living) Trust – Your Flexible Blueprint

A revocable trust is the most common trust tool we use in estate planning. It acts as a private, flexible set of instructions for managing and distributing your assets, and you can change or revoke it anytime.

The Revocable Trust delivers three key benefits for your home:

1. Probate Avoidance: When you sign the deed transferring your home into the trust, the trust officially owns it (though you control it). When you pass away, the home is not part of your probate estate. Instead, the successor trustee you named steps in immediately to manage and/or transfer the property according to your wishes, saving your loved ones time, money, and stress.
2. Clear Rules and Use: As the creator of the trust, you can clearly define who inherits the property and under what conditions. For instance, you can specify that the house must be sold and the proceeds split equally, or you can allow one child to live in the home for a certain period while paying all expenses, resolving potential family disputes ahead of time.
3. Preserved Tax Basis (The Step-Up): A crucial advantage is that placing your home in a Revocable Trust does not interfere with the capital gains “step-up in basis” at death. This is often an overwhelming concern for clients. If your beneficiaries sell the home shortly after your death, the appreciated value is typically reset to the market value on the date of your death, potentially eliminating thousands of dollars in capital gains tax they would have otherwise owed.

Option 2: The Irrevocable (Asset Protection) Trust – The Protective Shield

For clients whose main concern is protecting their home from future healthcare costs, particularly those associated with nursing home care (Medicaid), we look at an irrevocable trust or Medicaid asset protection trust. This is a more advanced planning strategy that requires careful consideration.

The Irrevocable Trust delivers asset protection while retaining many core benefits:

1. Medicaid Qualification: To shield your home, you must transfer it into the irrevocable trust and wait out the look-back period (currently five years). Once this period is met, the home is no longer considered a countable asset for Medicaid qualification, allowing you to qualify for benefits while preserving the home for your heirs. With this strategy, while you no longer own the house, you and your spouse get to live in your home rent-free for the rest of your life while protecting it for your heirs.
2. Retained Tax Benefits: Critically, a properly structured irrevocable trust can still retain the probate-avoidance benefit and, in most cases, the capital gains “step-up in basis” at your death.
3. The Trade-Off: Unlike a revocable trust, the transfer into an irrevocable trust is permanent, you cannot simply change your mind and undo the transfer. You give up the right to sell or mortgage the home directly, and must consult with the Trustee to manage it. The house, or its value, will never be “yours” again. This loss of direct control is the price of asset protection.

Making Your Decision

The best strategy depends entirely on your personal goals and financial situation. If your main concern is simply avoiding probate and setting clear instructions, the revocable trust is the simplest solution. However, if you have a solid estate plan in place but also want to protect your home from long-term care costs, the irrevocable trust is a necessary, powerful tool.

As we look toward the New Year, consider giving yourself and your family the gift of clarity and security. This is a specialized area of law, and it’s important to work with attorneys experienced in both real estate and sophisticated estate planning.

Contact our office today to discuss which trust strategy is right for you.