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would they lose the primary home gain exclusion if they contribute the property to the trust? Would they be better off selling the house and putting the proceeds into the trust.

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The cost basis of their home, if they bought the home, is generally what they paid for it, plus the cost of improvements they can document, such as a remodel or room addition. If they put their home into a trust, the cost basis will typically be that same number. However, what happens to the cost basis after that depends on what type of trust they put it into. If it's a revocable living trust, the basis typically changes at death. If they take the (much bigger) step of putting it into an irrevocable trust, the basis typically "freezes" at that point and doesn't change. Another thing that can affect the basis is if the home is used as an investment property- things like depreciation can have an effect on the cost basis. Please note: this is not meant to be any form of tax advice, just general thoughts on the subject. For specific advice on the cost basis, your parents should consult their tax professional.
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I would consult a lawyer and a tax advisor because taxes must be paid by the conservator/guardian if they are incapable. I just asked a lawyer about trust and i was told that usually it would have to be a fairly large sum of money in order to be put into a trust. You could put the proceeds into a bank account with two persons names (person and POA). This is not a sellers market so it should be worth it.
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Trusts are tricky, my suggestion is to see an attorney who practices that speciality who is in the county or area where the property is. Many stockbrokers or other financial advisors or big producer real estate agents will have a short list of attorneys who do real estate oriented trusts, so ask about. This really is not the sort of thing to have the guy you know from high school who is an attorney to do.

I totally agree with Prophet that you need to have real $$ for Living Trust as it must be maintained. But LT can’t be easily contested, it’s all private unlike a will & probate.

For some a living trust works well - with ALL assets are placed in a trust. The title on the house deed and all other assets would change to reflect the trustee ownership. You would be the successor or grantor in the trust. If you do this – must be done by an attorney and it needs to be maintained too - so it needs a source or stream of $$ to maintain it.

If you should in the future have Medicaid pay for their care, then I think you don't need to worry about any Medicaid recovery as LT doesn’t go to probate. Probate is how states enforce MERP lien or claim. So in theory, Living Trust = No MERP.

You do need to be careful and make sure that ALL assets are in the trust - if you leave something out, then it will need to go to probate and can expose the trust.
Again you need to spend the $ and get really need good legal on this.

I've been executrix twice for aunts, and 1 of the estates involved a prior marriage who had a LT so in theory everything was in a trust except he had excluded some oil & gas revenues as they weren't worth much (as most are) but then they showed up when probating her will and well it was quite the clusterF to unravel. So having all assets in the trust is super important and often the elder just doesn't realize or remember what's out there. Good luck.
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