1. 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)

2. 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

3. 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.

4. 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.

5. 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

6. 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.

7. 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

8. 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.

9. 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.

10. 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