The Income Only Trust
By Nicole Livingston
How can you protect your assets if you need a nursing home? This is a question that I am often asked. There is a trust you can create called an Irrevocable Income Only Trust; however, there are several conditions that must be discussed. The first of which is control of the assets. With this type of trust, you must give up control of all assets which means that you cannot be the trustee of this trust. Next, the trust must be irrevocable which means that you cannot change the terms of the trust once signed. Finally, there is a five year waiting or penalty period before you can become eligible for Medicaid.
The key to the Irrevocable Income Only trust is that the principal may not be used to provide for the applicant of Medicaid. The applicant, if married, includes husband and wife. The principal of the trust may be used for others, including children or other beneficiaries. The strategy is designed for a client who may need Medicaid benefits down the road but has no current need. The person who may need Medicaid benefits in the future would set up the Income Only trust.
You would be the grantor/trustor of the trust. A child or a third party would be the trustee of the trust. You would be the income beneficiary of the trust. The trustee must not distribute principal to you underanycircumstances. The children or other beneficiaries would be permissible principal beneficiaries during your lifetime and after your death. The distributions to these beneficiaries during your lifetime would be completely within the discretion of the trustee to allow flexibility. For example, the trustee could make distributions to the beneficiaries in equal amounts who could then gift the money to you. However, you have no right to demand such use.
The purpose of the trust is to take assets out of your hands for Medicaid purposes while still allowing you to have the benefit of the income from the assets. The income tax is still attributed to you personally. The trust maintains your social security number when accounts are opened in the name of the Income Only trust. The income only trust is a grantor trust. All the assets in the trust are also included in your estate for federal and Maryland estate taxes.
There is a five year penalty period. The transfer of assets into the trust is a gift for Medicaid purposes, not IRS purposes (i.e. gift tax). This strategy is best used where the future applicant is likely to have five years before application for Medicaid benefits. When you apply for benefits after the five year penalty period, the underlying assets or principal of the trust is a non-countable asset. However, the income of the person applying for benefits is payable directly to the nursing home. This is often called a co-payment under Medicaid. If married, the spouse who lives at home can keep all of their income. Upon death, the trust would specify who should receive the assets in the trust. Medicaid would not have a right of reimbursement against assets in the trust. The trust also allows you to avoid probate.