Legal Question in Wills and Trusts in Florida

My parents have set up an irrevocable grantor trust in Massachusetts, with my sister and me as the trustees (and beneficiaries.) They contributed various assets (e.g., Charles Schwab brokerage account with mutual funds), plus their primary residence. The residence was contributed to the trust with a life estate granted to the parents, allowing them to live in the house for the rest of their lives. Both parents are still alive, and they now want to move out and sell the house - and my sister and I agree, as trustees.

The question is: in order to maintain the integrity of the trust [for the sake of potential future asset sheltering from, e.g., Medicaid paying for long-term medical care facilities], should we:

(1) have the parents legally return the life estate to the trust, so the trust will be the sole owner of the house when it is sold - and responsible for capital gains tax on the gain; or

(2) have the trust return the deed to the parents, so the parents will be the sole owners of the house when it is sold - presumably allowing them to take advantage of the capital gain exemption for primary residence; or

(3) leave things as-is, and sell both the life estate and the trust's remainderman position to the buyer, and split the proceeds of the sale between the parents and the trust, per IRS actuarial tables?

There are obviously potential tax implications to be considered in the decision, but for now I'm primarily interested in how to maintain the integrity of the trust for the sake of asset protection in potential long-term care situations.

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