sale of primary residence - residence own by a Testemantry Trust.

There are several different aspects to your situation which require detailed analysis.  To begin with, if the trust was drafted in a manner which would disqualify the residence from obtaining the capital gains exclusion for the first $250,000.00 of capital gains, there may still be a significant reduction if not elimination of capital gains tax. Upon the death of your uncle, the residence would be revalued as of his date of death.  It would be this value which is to be compared to the sales price last year.  In addition to this value, there should be added any capital improvements to the residence.  This is your starting point. Next, an analysis should be made based upon the language of the trust as to whether the language which permits your aunt to live there as long as she wants qualifies as a "life estate".  If it does, then your aunt has an interest in the residence which belongs to her and as such should qualify that portion of the sales price for capital gains exclusion treatment.  This value is determined by taking the IRS 7520 interest rate for the month of the sale and cross-referencing her age to that interest rate.  This will determine the percentage of the sales proceeds that are hers. The remaining portion of the sales proceeds should belong to the testamentary trust and may be subject to capital gains tax.  The trust hopefully specifies what will happen to those proceeds belonging to the trust (whether they remain in trust for your aunt or some other disposition of those funds). Great care and planning should be taken with the proceeds belonging to your aunt as without proper planning they will most likely be spent on her care in the nursing home.  Proper planning can preserve at least 1/2 of those funds for her care and qualify her for Medicaid in an expeditious fashion as possible. An attorney who specializes in Elder Law should be consulted to determine if the proper advance planning documents are in effect now (power of attorney) or whether perhaps a Guardianship may be necessary to preserve the assets of her estate. - Alfred Polizzotto, III