Medicaid Planning and Irrevocable Income Only Trusts (IIOT)

Irrevocable income only trust is a Medicaid asset protection trust allows a person to qualify for long-term care benefits from Medicaid while protecting assets from being depleted if long-term care is needed.

To qualify for Medicaid, assets must be under a certain level. Rules about asset levels are strict, and there is a five-year lookback period to see if an individual qualifies. When an irrevocable income only trust is created, and assets are transferred five years before the donor applies for Medicaid long-term care benefits:

• Medicaid does not penalize the donor for transferring trust assets.

• The trust’s existence doesn’t impact Medicaid eligibility.

Assets placed in an irrevocable income only trust are not considered countable for Medicaid. Once the income only trust owns assets, Medicaid cannot count the asset and the asset can’t be seized to reimburse long-term costs. Income that is distributable to the beneficiary will still be paid to them even if they are in a long-term care facility.

When an IIOT protects a primary residence, the homeowner continues to live in the home. If investment assets are transferred to the income only trust, the former owner may not sell the investments but may continue to receive income generated from the investments; a IIOT can be designed as an income-only trust. Note that IIOTs are irrevocable trusts, so once any assets are placed in the income only trust, the grantor loses control of the assets.

Qualified plans and individual retirement accounts cannot be transferred to a income only trust, so it may be necessary to liquidate some accounts to fund an IIOT.

An IIOT is not your only option, however. Sometimes it makes sense to transfer the home to the well spouse, who may own and remain there. The spouse may retain a limited amount of assets.

The house could be transferred without penalty to:

• A child under age 21 who is blind or disabled.

• A trust for the sole benefit of a disabled individual under age 65.

• A sibling who has lived in the home for two years before the Medicaid applicant’s move into a nursing home and who already owns an equity interest in the home.

• A caretaker child — a child of the Medicaid applicant who’s lived in the house for two years before the applicant moved into the nursing care facility and who had provided care that allowed the person to stay home.

If the house is sold by the person on Medicaid benefits while that person is in a nursing home, that person will become ineligible for Medicaid, and the proceeds of the sale of the house may have to be used to pay nursing home bills.

A life estate is another strategy that people try in order to become eligible for Medicaid. That is, an elderly homeowner deeds a house to a grown child but retains the right to live there for the rest of her life. However, if a home is placed in a life estate and then sold while the owner is still living, it is possible that the value of the life estate may need to be reimbursed to Medicaid. The child may have to pay a capital gains tax on the sale.

This is just a summary of an extremely complicated process. There are many provisions and limits. To make sure you are protected, work with legal and financial professionals.

Do you have questions?

Count on your experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at 860-854-3809, or email us at info@esmlaw.com.