How Can We Protect Home Sale Proceeds to Supplement Income?

It is a common and stressful dilemma: being “house-rich and cash-poor.” At 72 and 81, your priority should be your quality of life and making your hard-earned equity work for you, rather than the other way around.

Because you have a living trust and reside in different states, there are specific strategies to protect that cash so it lasts for your needs while still honoring your goal of leaving an inheritance for your children.

1. The tax benefit: Section 121 exclusion.

The best way to protect the proceeds from the sale of a home is to avoid paying Uncle Sam a large cut in capital gains taxes.

• If the partner who owns the lesser-value home has lived in it as their primary residence for at least two of the past five years, they can likely exclude up to $250,000 of the profit from federal income tax.
• Since you spend summers there, ensure you meet that “2-out-of-5” rule. This allows you to keep almost every penny of the sale price to fund your daily living expenses.

2. Managing the cash within your trust.

Since you already have a living trust, you don’t necessarily need to dismantle it. You can simply shift the form of the asset.

• Move sale proceeds into the trust: Instead of the trust owning a “house,” it will now own a “brokerage or high-yield savings account.”
• The “income stream” approach: You can instruct the trust (or manage it yourselves as trustees) to pay out a specific monthly “stipend” to yourselves from that cash. This supplements your Social Security without you having to manage a rental property.

3. Protecting assets from long-term care (Medicaid).

This is the big worry for many seniors. If one of you needs nursing home care later, Medicaid has strict asset limits.

• The problem: Cash in a bank account (even in a standard living trust) is usually counted as an available asset, which might have to be spent down before Medicaid kicks in.
• The solution: Consult an elder law attorney about potentially adjusting your trust to be Medicaid-compliant. However, note that making a trust “Medicaid-proof” often means you lose direct access to the principal, which contradicts your goal of using the money to live on now.

Keeping the Home vs. Selling for Cash

4. Practical financial steps.

To make this money last, consider these low-risk options for the proceeds:

1. High-yield savings accounts (HYSA): Safe, FDIC-insured, and currently offering decent interest rates.
    
2. Annuities: You can trade a lump sum for a guaranteed monthly check for the rest of your lives. This acts like a “second Social Security check.”
    
3. T-Bills or CDs: Very safe ways to earn interest while keeping the principal protected for the kids.

Important Note on State Lines

Since you live in neighboring states, ensure your trust is valid in both states. While most states honor trusts from others, state-specific situs (location) laws regarding property taxes and Medicaid eligibility can vary wildly.

You may also qualify for property tax exemptions for seniors in your current states, which could buy you some time while you decide whether to sell.