How an Irrevocable Income-Only Trust Works to Protect Your Assets

Estate planning can feel overwhelming to many people; it’s one of the reasons so few have created an estate plan. Another reason is that it can be challenging to contend with the concept of our own mortality.

But the future is coming, one day at a time, and we need to prepare for it. By establishing a comprehensive estate plan, you can safeguard your interests, hard-earned assets, legacy, and final wishes today and into the future.

Many families in New Britain and Avon worry about the rising cost of long-term care. You might wonder whether a lifetime of savings or the family home will be lost to pay for a nursing facility. One specific tool we use to address these concerns is an Irrevocable Income-Only Trust (IIOT). Understanding how an irrevocable income-only trust protects your assets is a vital step in securing your financial legacy under Connecticut law.

The Foundation of an Irrevocable Income-Only Trust.

An IIOT is a legal arrangement where you transfer ownership of certain assets, such as your home or investment accounts, into a trust. Because the trust is irrevocable, you cannot dissolve it or take the principal back once you fund it. This loss of control provides the legal protection necessary to shield assets from long-term care costs.

In Connecticut, the Department of Social Services (DSS) follows strict guidelines regarding what counts as an “available asset” when determining Medicaid eligibility. According to Connecticut General Statutes § 17b-261, assets held in an irrevocable trust may be excluded from your asset limit if you no longer have the legal right to access the principal for your own support.

How the Income-Only Provision Functions.

The “Income-Only” part of this trust is its defining feature. While you give up the right to the principal (the original money or property put into the trust), you retain the right to receive the income generated by those assets. This income might include:

• Interest earned from savings accounts
• Dividends paid out from stocks
• Rental income from real estate property

This structure allows you to maintain your lifestyle while shielding the underlying assets. If you live in a town like Avon and place your primary residence in the trust, you can also retain the right to live in that home for the rest of your life.

Medicaid Planning and the Five-Year Look-Back Period.

The primary reason our clients in Hartford County consider an IIOT is to qualify for Medicaid without spending down every penny they own. Connecticut law requires a “look-back” period of 60 months for any transfers of assets for less than fair market value.

Under 42 U.S. Code § 1396p, which governs Medicaid transfers nationally and applies in Connecticut, any asset moved into an IIOT must remain there for at least five years before you apply for long-term care assistance. If you need care before those five years pass, you may face a penalty period of ineligibility. This is what makes early planning essential for families near New Britain.

Protecting the Family Home in Connecticut.

For many residents, their home is their most significant asset. In Connecticut, while a primary residence is often excluded from Medicaid limits while you live there, it is not protected from “Estate Recovery” after you pass away.

The Connecticut Department of Social Services has the right to file a claim against your probate estate to recoup the costs of care paid on your behalf. By transferring the home into an IIOT, the property is no longer part of your probate estate. This can prevent the state from placing a lien on the house, ensuring it passes to your children or chosen beneficiaries instead.

Tax Benefits and Considerations.

Using an IIOT is not just about Medicaid; it also offers specific tax advantages. When you move assets into this type of trust, they are typically structured as a “Grantor Trust” for income tax purposes. This means you continue to report the income on your personal tax return.

More importantly, your heirs can still benefit from a “step-up in basis.” When your beneficiaries eventually sell a home or stocks held in the trust after your passing, their capital gains taxes are calculated based on the value of the asset at the time of your death, rather than what you originally paid for it. This can save your family a significant amount of money in the long run.

Choosing the Right Trustee.

Since you cannot act as the trustee of your own IIOT while seeking asset protection, choosing a successor is a significant decision. Most clients choose an adult child or a trusted family member. We help you understand the responsibilities this person will assume, ensuring they have the guidance needed to manage the trust in accordance with Connecticut fiduciary standards.

Why Local Guidance Matters in Hartford County.

Connecticut’s probate system and Medicaid rules are notoriously complex. A mistake in how a trust is drafted or funded can lead to denied benefits or unnecessary taxes. We serve clients throughout the Farmington Valley and Central Connecticut, navigating the local probate courts in New Britain and the surrounding areas.

Every family has a different dynamic. Some are concerned about protecting a small family farm, while others want to ensure a spouse can remain comfortably in their Avon home. We look at the whole picture to ensure your estate plan meets your specific needs.

Partner with Law Offices Of Ericson, Scalise & Mangan, PC.

Our Connecticut law firm has extensive experience representing clients interested in creating, revising, or disputing estate planning documents. As your legal representatives, we will make every effort to guide you throughout the process and simplify matters for you and your family. Building enduring, trusting relationships with our clients is the hallmark of our practice, and we treat every individual with compassion and understanding.

Contact our law offices to schedule your initial consultation today. In your case review, we will discuss your goals, financial abilities, family dynamics, charitable desires, health, long-term care planning, and more. In addition to estate planning, our legal team has experience in business law and real estate transactions. Call us in New Britain at 860-854-3809 or Avon at 860-854-3545 and schedule a consultation on your unique situation today.