Call Us Now
Email Us NowLong-Term Asset Preservation Through Income-Only Trusts
As our clients age, many are concerned about protecting their assets and determining Medicaid eligibility should they need to enter a nursing home. One of the best legal options for Medicaid planning is an irrevocable income-only trust (IIOT). This type of irrevocable trust not only protects assets but also allows the grantor (the person creating the trust) to receive income exempt from the Medicaid asset limit.
If you have questions about how you and your family members could benefit from creating an IIOT, contact the Law Offices Of Ericson, Scalise & Mangan, PC today to schedule a consultation. A qualified legal team member will review your case and determine which legal options best suit your needs.
What is an Irrevocable Income Only Trust (IIOT)?
Transferring assets into an Irrevocable Income Only Trust (“IIOT”) is increasingly common in Medicaid/Title XIX planning. The purpose of the IIOT is to generate income, protect and manage assets, obtain future Medicaid eligibility, and avoid the costs and time associated with probate.
IIOTs allow individuals to transfer their assets into a trust for protection, rather than making outright transfers to their children. Under the terms of an IIOT, the person(s) establishing the trust (“grantor”) will receive all of the income produced by the assets in the trust for their lifetime.
What are the Advantages of IIOT?
Because an IIOT is an irrevocable trust which cannot be revoked or amended, it has several legal advantages structured to help the grantor should they need to apply for Medicaid benefits, as well as numerous tax advantages.
Permit Medicaid To Pay
IIOTs are commonly used to allow Medicaid to cover the high cost of long-term care after the Medicaid look-back period has passed. The look-back period is currently set at five (5) years. The five-year look-back rule means that Medicaid will penalize an applicant who gives assets to others (including a trust) within five years before filing a Medicaid application.
If the grantor places the grantor’s home in the trust, the trust agreement may provide that the grantor may continue to reside in the home for the grantor’s lifetime.
Irrevocability
IIOTs are irrevocable. The grantor cannot revoke the trust and reacquire the assets. Therefore, the assets are not available for Medicaid eligibility purposes after the initial five-year look-back period. That said, once real estate is transferred to an IIOT, it cannot be mortgaged.
Tax Benefits
For Connecticut income tax purposes, the grantor is treated as the owner of the trust because the trust’s income tax rates are typically higher than the grantor’s. The grantor also retains their Section 121 personal residence exclusion, which can exempt up to $500,000 of gain on the sale of a principal residence (up to $250,000 for an individual) from capital gains tax.
What Happens to the Assets in the IIOT Upon My Death?
Upon your death, the trust assets obtain a “step-up” in value. A “step up value” means that when the assets are distributed to your chosen beneficiaries, the beneficiaries’ basis in the assets for income tax purposes will be the value of the assets as of the date of your death. As a result, the beneficiaries will avoid any capital gains taxes on the appreciation of the trust assets between the date of acquisition and the day of your death if the property is sold afterward.
Additionally, the IIOT can be drafted to include an extraordinary power of appointment for the limited purpose of including the trust assets in your “estate” for estate tax purposes. A special power of appointment will also permit you to change the beneficiaries who will receive the assets upon your death.
The irrevocable income-only trust can be a valuable tool for long-term care Medicaid planning, protecting assets intended to pass to children or others, and avoiding probate.
What Types of Assets Can Be Placed in an IIOT?
Federal and Connecticut state law require that only specific assets may be placed in an IIOT. These assets can include cash, real estate, and financial investments. Even though an IIOT offers numerous asset protections, once assets are placed in the trust, they belong to the trust and generally cannot be removed.
Even though an IIOT is meant to protect your financial resources, there are a range of assets that should not be placed into an IIOT, including some life insurance policies, IRAs, and 401(k)s. Investment accounts such as IRAs and 401(k)s are tax-deferred, and moving them into an IIOT can introduce tax complexities that are challenging to manage.
What are the Benefits of Hiring the Law Offices Of Ericson, Scalise & Mangan, PC to Help Me With My Legal Needs?
As with any estate planning matter, it is always the best option to work with a knowledgeable attorney who can advise you of your legal options, especially in terms of Medicaid planning, so that you are not inadvertently penalized.
The Law Offices Of Ericson, Scalise & Mangan, PC is a Connecticut law firm dedicated to helping clients protect their assets so they can feel secure about the future. Contact our law firm at our New Britain office today at 860-854-3809 or at our Avon location at 860-854-3545 to learn more about IIOTs and your options.
