‘Do we have to buy a house for equal value or can we buy a less expensive house?’
My husband is 70 and I’m 68. He just began taking Social Security from which he gets $4,700 a month. I am going to wait until I’m 70 before I collect Social Security, at which time I’ll receive $3,000 a month. We have savings of $600,000 in a high-yield savings account (4% APR) and we live in a house worth approximately $1.2 million.
We live on Long Island where taxes are extremely high and find the area to be more and more congested. Should we sell the house and buy something in a lower tax area? Also, we put the house in an irrevocable trust years ago with my daughters being the trustees. If we sell it, do we have to buy a house for equal value or can we buy a less expensive house?
If so, what happens to the excess money? Will it be available for us to use if necessary?
Selling or Stuck
Choosing to sell your home when it’s in an irrevocable trust may seem like a challenge, but it doesn’t have to be — so long as you and your husband and kids are all on the same page.
Downsizing in retirement is very common, especially for those who live in a house far too big to manage or in an area that is very expensive. Before you put your house on the market, it’s always best to be sure of what your next steps would be. Even if you don’t have the next home picked out, start researching neighborhoods or types of housing you’d like.
For example, there are plenty of cooperatives and condos designed for older residents with all the bells and whistles to keep them healthy and entertained (think pools, tennis courts, a studio for yoga or pilates, a cafe and so on).
As for the irrevocable trust, I assume you and your husband are the grantors since it is your home, but the terms of the trust as written out in the legal document will supersede anything you’ll find online, so be sure to have an estate attorney look everything over as you proceed.
If it’s a typical asset protection trust — like those that protect your money from Medicaid — all the same tax implications of selling a home still apply to you. If you and your spouse have lived in the home as your primary residence for two of the last five years, you are eligible for a $500,000 exemption on the profit of the sale (the exemption is $250,000 for single taxpayers).
You will need to know what your basis in the home is in order to figure out the tax consequences. The basis is what you paid for the home plus any capital improvements you’ve made through the years. Then, simply speaking, you’d subtract your exemption and your basis from the sale price to see what kind of tax liability you have.
It will be simpler if your next place is less expensive than your first, said Brian Tully, founder and managing partner of Tully Law Group. The proceeds from the sale will go back into the trust, even if it’s going to be used to buy another property, so the “cleanest” option is to avoid mortgage financing, he said. If more cash is added to the trust, you might also need a new five-year lookback period if it is an asset-protection trust, Tully said.
Regarding the actual selling and purchasing, the legal operator is really the trust now, and your daughters as trustees are responsible for signing off on all of the decisions.
Of course, all of this depends on the wording of the trust itself. There should be stipulations included, giving you and your husband the right to live in the home owned by the trust, and the trustee does the buying and selling. The trust will own the new house, just like it owned the old one.
Hopefully, you have a good relationship with your children, who will be willing to sign off on any of your decisions and attend these closings. If not, there might be a way for you to remove the primary trustee, in which case the successor trustee would step up, or you could even appoint someone else — again, depending on the language in the trust.
Do your due diligence as you look into a new home and have open communication with your daughters about your wishes.
