Irrevocable Income-Only Trusts in Connecticut: Pros, Cons & Use Cases

Planning for long-term care costs is one of the most pressing financial concerns facing Connecticut residents. With nursing home costs in the state averaging over $180,000 per year for semi-private rooms, many families in Avon and surrounding towns turn to irrevocable income-only trusts as a planning tool. Understanding how these trusts work, what they protect, and where they fall short is essential before deciding whether one belongs in your estate plan.

What Is an Irrevocable Income-Only Trust?

An irrevocable income-only trust holds assets for Medicaid planning purposes, allowing the grantor to receive income but not principal distributions.

An irrevocable income-only trust (IIOT) is a legal arrangement in which a person, called the grantor, transfers ownership of assets into a trust that cannot be easily changed or revoked after it is signed. The grantor retains the right to receive income generated by those assets, such as interest or dividends, but gives up access to the principal itself.

This distinction matters enormously for Medicaid eligibility. Under Connecticut’s Medicaid rules administered through the Department of Social Services, assets placed in an IIOT are generally not counted as available resources once the trust’s five-year look-back period has passed. However, any income distributed from the trust will still count toward income eligibility limits and must be applied toward the cost of care once enrolled in Medicaid. Connecticut follows federal Medicaid law under 42 U.S.C. § 1396p, which governs transfer-of-asset penalties and trust rules for long-term care eligibility.

How Connecticut’s Medicaid Rules Apply to These Trusts

Connecticut Medicaid applies a 60-month look-back period to asset transfers, including those made into irrevocable trusts.

Connecticut’s HUSKY C program, which is the state’s Medicaid program for adults needing long-term care, evaluates asset transfers made within the 60 months before an applicant applies for benefits. Transfers made to an IIOT during that look-back window can trigger a penalty period during which Medicaid will not cover nursing home costs.

This is why timing matters so much. Families who wait until a health crisis to act often find themselves outside the window needed to benefit from trust planning. Starting the process years in advance, ideally while the grantor is still healthy and legally competent, gives the trust time to season and the look-back period time to expire before a Medicaid application becomes necessary.

The Connecticut Department of Social Services publishes eligibility guidelines that govern how trust assets are treated during Medicaid reviews, and the rules around what counts as income versus principal require careful drafting from the start.

The Pros of an Irrevocable Income-Only Trust

IIOTs can shield significant assets from Medicaid spend-down requirements while still giving the grantor an income stream during their lifetime.

When structured correctly, an IIOT offers real, measurable benefits:

• Asset protection after the look-back period. Once five years have passed since the transfer, the trust principal is generally not counted as an available Medicaid resource.
• Continued income. The grantor still receives any income the trust assets generate, which can help cover everyday living expenses.
• Probate avoidance. Because the assets are held in trust, they pass to beneficiaries outside of the probate process, which can save time and reduce costs for the family.
• Preserved inheritance. Assets transferred to an IIOT can eventually pass to children or other named beneficiaries rather than being depleted to pay for care.

For homeowners in Avon with significant equity, an IIOT can be very useful in the right circumstances when the primary residence is transferred into the trust early in the planning process.

The Cons and Limitations to Understand

Transferring assets into an irrevocable trust means giving up control permanently, which carries real financial and personal trade-offs.

These trusts are not without drawbacks. The grantor gives up legal ownership of the transferred assets the moment the trust is signed. That means the home cannot be sold and the proceeds pocketed without going through the trust’s terms. Refinancing becomes more complicated. If the grantor experiences a financial emergency and needs access to the principal, that money is no longer available to them directly.

There are also tax considerations. Connecticut imposes its own income tax on trust income under Conn. Gen. Stat. § 12-700 et seq. While trusts face higher compressed tax rates, IITs are typically structured as grantor trusts for tax purposes. This ensures income is reported on the grantor’s personal tax return at individual tax rates rather than higher trust-level rates.

Finally, an IIOT does nothing to address immediate care needs. If a person requires nursing home care before the five-year look-back period has cleared, the trust assets will still be factored into the Medicaid penalty calculation.

Who Benefits Most From This Planning Tool?

IIOTs work best for individuals who are healthy, own significant assets, and are planning at least five years before they may need long-term care.

The ideal candidate for an IIOT is typically someone in their late 50s to mid-70s who is in good health, owns a home or other significant assets, and wants to take proactive steps to protect what they have worked to build. Married couples can also use IIOTs strategically, though the rules around spousal protections under Connecticut’s Medicaid program add additional layers of complexity that require careful attention.

IIOTs are less suitable for individuals who may need flexible access to their assets, who have already received a serious diagnosis that shortens their planning horizon, or who are primarily motivated by estate tax concerns rather than Medicaid planning.

Talk to an Attorney Before You Decide

Medicaid planning with an irrevocable income-only trust is one of the most consequential decisions a family can make. A trust that is drafted incorrectly, funded improperly, or created too close to a care need can cause serious problems rather than solving them.

At the Law Offices Of Ericson, Scalise & Mangan, PC, we work with Connecticut families on estate planning and elder law matters, including Medicaid planning strategies designed to protect what matters most. If you are considering an IIOT or want to understand your options, we encourage you to contact us to schedule a conversation. Reach our New Britain office at 860-854-3809.