Attorney Thomas B. Burton answers the following question: Can I Sell House in Irrevocable Trust and Use Cash on Other House in Trust?
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Welcome back, I'm Attorney Thomas Burton.
I'm an estate planning and asset protection attorney here in Wisconsin and today's question comes from Stevens Point, Wisconsin and the reader asked the following -
"Can the proceeds from the sale of one house in an irrevocable trust be used to make improvement on another house in the trust? We have three houses in an irrevocable trust. We live in one, daughter lives in one and granddaughter in the third. At time of forming trust, we understood if one of the houses was sold, improvements could be made to the other two. Time has come to sell one and checking to be sure this is correct; trust was formed 01-15-15."
So it's important that you knew to ask this question before proceeding because this is a complicated area of law. It sounds like you set up an irrevocable trust and place three properties inside of it, possibly for asset protection. So first of all, if I were your attorney, I would examine the trust document in question. So if you have a copy of the trust, you should, you can go look at it yourself and see if there's a power inside the trust to buy or sell assets or substitute trust property. Now most of the trusts I draft, I include this power for the trustee. So if this was a trust I drafted, that included this power, this means that as long as the three houses are all inside the trust, you could sell one house and then keep those funds inside the irrevocable trust and use them to improve the other two houses still inside the irrevocable trust or in my example, you could keep the money inside the trust and buy a third house but it sounds like what you want to do is sell house number three and use the cash to improve houses one and two. Now assuming the trust, the irrevocable trust has the power for the trustee to buy or sell trust assets and that you keep the money inside the irrevocable trust, you should be able to do this but again, it's going to depend on the language of your specific trust because each trust is different and it depends how it was drafted.
So but the key for maintaining the asset protection of the trust is that you cannot sell house number three for example, and then deposit that cash into your personal bank account. If you do that, and take the money out of the trust, then you're going to remove the asset protection on those funds that you gained and you mentioned here, you formed the trust 1-15-15, so according to my calculations, that's over six years ago, now that we're in 2021 and if you did this for a Medicaid asset protection, the look-back period is five years. So you should be past that look-back period, that's why going forward, it's important that, to keep all the assets inside of the irrevocable trust wrapper. So when I am setting up an irrevocable trust, I often draft us a square and what we're doing is putting assets inside that box to provide asset protection to those assets and the key for maintaining it is always keeping the assets inside that box. So if you have a bank account set up for the trust, that money when you sell the third property should be immediately placed into the trust bank account. If you don't have a bank account set up, then I would suggest you get that opened up, work with your attorney to open up the irrevocable trust bank account to accept the money before you close on the sale of that third house because what I've seen happen is these transactions are often moving fast with real estate and by the time, you may get a buyer right away and then you've got a sale and you've got to put the money somewhere and you don't want the title company to inadvertently write to check out directly to you, John Smith, individual, you want it to be made out to the Smith Irrevocable Trust or whatever the name of your trust is.
So that's how I would approach this situation.
Now if you worked with an attorney which I'm guessing you did, to set up the irrevocable trust and you review, you can review the trust yourself for free and see if these powers are inside but if you need, if you want to be sure, just contact that attorney who drafted it and I'm sure, they'd be happy to answer your questions about the trust and what you need to do now with this transaction with possibly selling house number three inside the trust.
So good question. You're doing the right thing by thinking about this before you sell the house and have the check already made out, perhaps erroneously. So good job thinking ahead, being proactive on this and for my other viewers, as you're listening to the answer to this question, the takeaway for you is that you always want to keep those assets inside the irrevocable trust to maintain the asset protection. So the reason I answer these questions pro bono on my YouTube channel as a service to the public is to help educate and inform others in order to empower you to take charge of your own estate planning. So if this video has been helpful to you please consider giving it a LIKE, so that the YouTube algorithm will recognize that and it will show it to more people and help them as well.
Thanks for watching and we'll see you next time.
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