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For many New Yorkers, the family home is both their largest asset and a deeply personal symbol of security and legacy. Unfortunately, the cost of long-term care, often $15,000 to $20,000 per month, can put that home at risk if Medicaid coverage becomes necessary.

Placing your home into an irrevocable Medicaid trust is one of the most effective ways to protect its equity from potential nursing home costs while maintaining certain valuable tax benefits and property exemptions.

How an Irrevocable Trust Protects Your Home

When you transfer your home into an irrevocable Medicaid trust, ownership of the property is legally moved out of your name and into the name of the trust. Because the home is no longer considered your asset, Medicaid cannot require it to be sold to pay for care once the five-year lookback period has elapsed.

However, unlike gifting the home outright to children, the trust structure allows you to retain significant control and tax benefits while ensuring long-term protection.

Retaining a Life Estate and Control

In nearly all cases, the trust is drafted so that the homeowner retains a life estate, the right to live in the home for the rest of their life, without rent or interference. This means you continue to:

• Live in and use the property just as before.
• Pay property taxes and insurance, maintaining your STAR or Enhanced STAR exemption.
• Control repairs, maintenance, and improvements.

This arrangement allows peace of mind, you’ve protected the home from nursing home costs but still retain all practical benefits of ownership during your lifetime.

Preserving the Step-Up in Basis

One of the most valuable tax advantages of the irrevocable trust structure is the step-up in basis at death. Because the trust is designed so that the home remains part of your taxable estate for income tax purposes, your heirs receive the property at its fair market value as of your date of death.

This step-up eliminates capital gains tax on appreciation that occurred during your lifetime. For example, if you bought your home for $100,000 and it’s worth $300,000 when you pass, your children can sell it for $300,000 with no capital gains tax owed on that $200,000 increase.

If the home were transferred outright during your lifetime (without a trust), your children would take your original basis and could owe substantial taxes when selling later.

Preserving the $250,000 / $500,000 Home Sale Exclusion

By retaining a life estate, you also maintain eligibility for the home sale capital gains exclusion available to homeowners who have lived in their residence for at least two of the past five years.

• Single individuals can exclude up to $250,000 of gain on the sale of their primary residence.
• Married couples can exclude up to $500,000 of gain.

Because the trust is drafted to be grantor-type for tax purposes, you continue to file your taxes as if you still own the home personally, preserving this valuable exclusion if the home is sold while you are living.

Why a Trust Is Safer Than Deeding the Home to Children Outright

Some families consider transferring the home directly to children and retaining a life estate outside of a trust. While this may seem simpler, it carries significant legal, tax, and creditor risks.

1. Immediate Gift Tax and Reporting Issues

An outright transfer of the remainder interest to children is treated as a present taxable gift under federal tax law. This may require the filing of a gift tax return (Form 709) and use of a portion of your lifetime gift and estate tax exemption.
By contrast, transferring the home to an irrevocable grantor trust avoids this issue, because the trust’s terms delay the children’s beneficial enjoyment until your death, it is not considered a completed gift for income tax purposes.

2. Exposure to Children’s Creditors and Divorce

When the home is deeded directly to children, it becomes their asset, fully subject to their personal circumstances. This means the property (or their remainder interest) can be exposed to:

• Creditors’ claims or judgments,
• Divorce settlements, or
• Bankruptcy proceedings.

In contrast, property held within a properly drafted irrevocable trust is insulated from your children’s creditors and ex-spouses. The trust creates a layer of legal separation that preserves the home for family benefit, regardless of what happens in your children’s financial lives.

3. Loss of Flexibility and Complications with Sale

If you deed the home directly to children, selling or refinancing the property later becomes cumbersome, every child must consent and sign the deed or mortgage documents. With a trust, the trustee manages the property on behalf of all beneficiaries, simplifying administration while maintaining Medicaid protection.

The Downsides: Selling or Changing the Trust Later

While irrevocable trusts offer strong asset protection and tax benefits, they do have limitations. The most important is that they are, by definition, irrevocable, meaning you cannot unilaterally take the home back or make major changes once the trust is in place.

Selling the Home Inside the Trust

If the home is sold while in the trust, the sale proceeds remain in the trust, they cannot be paid directly to you.
This means:

• You can no longer use the full proceeds personally; they remain protected within the trust.
• The trustee may reinvest them (for example, in another home that you can live in under the same trust).
• You may lose the full home sale exclusion depending on how the trust is structured.

In short, selling the home while you are alive becomes more complicated because the trust, not you, owns the property.

Removing the Home from the Trust

If circumstances change and you wish to take the home back, doing so requires terminating the trust. This typically means obtaining the written consent of all trust beneficiaries and formally transferring the deed back into your name.
However, by doing so, the home loses its Medicaid protection, and the five-year lookback period restarts. Termination is therefore only advisable in limited circumstances and should always be discussed with your elder law attorney before any action is taken.

The Five-Year Lookback Period

Transfers into an irrevocable Medicaid trust are subject to the five-year lookback under federal and New York Medicaid rules. Any transfers made within five years of applying for nursing home Medicaid can create a penalty period of ineligibility.

The sooner the trust is established and funded, the sooner the clock starts running, and after five years, the home is fully protected from nursing home costs.

Balancing Flexibility and Protection

For most clients, the irrevocable Medicaid trust strikes the ideal balance between protecting assets and retaining practical control. It allows you to stay in your home, preserve your STAR exemption and tax benefits, and ensure your children inherit the property free from capital gains tax, all while shielding its value from the cost of long-term care.

At McConville, Considine, Cooman & Morin, P.C., we work with individuals and families throughout Rochester and Upstate New York to design trust plans that reflect both financial goals and personal comfort. Properly structured, an irrevocable trust is one of the most powerful tools available for long-term care planning and asset preservation.

If you would like to schedule a consultation to discuss creating or updating your estate planning, please contact our estate planning attorneys: Daniel S. Williford at 585-512-3511 or dwilliford@mccmlaw.com;  Spencer C. Malone at 585-512-3550 or smalone@mccmlaw.com; or Michael F. McConville at 585-512-3517 or mmconville@mccmlaw.com.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.

About MCCM

McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979.  With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.

We represent a diverse range of clients located throughout New York State and New England.  They include individuals, numerous manufacturing and service industry businesses, local governments, and health care professionals, provider groups, facilities and associations. We also serve as local counsel to out-of-state clients and their attorneys who have litigation pending in Western New York courts.  For more information, please contact us at 585.546.2500.