Protect Your Assets by Creating an Income only Trust

An “Income Only Trust” is a popular tool used by individuals to protect their assets from nursing home and long term care costs. In general, a trust is a property interest wherein properties held by an individual called the trustee, who is subject to a fiduciary duty, uses the property for the benefit of another (the beneficiary).

There are several individuals involved in the creation and operation of a trust. First, the “grantor” is the person who establishes the trust and then provides the “trust principal” (i.e., the property that is placed into the trust). The “trustee” is the person or entity who holds legal title to the property for the use or benefit of another. In the case of income only trusts, the trustee generally has no legal right to revoke the trust or use the property for his or her own benefit. The “beneficiary” of the trust is the person for whose benefit the trust exists. Although a beneficiary does not hold legal title to the trust property, he or she does have an equitable interest in the same. As an equitable owner the beneficiary has certain rights that will be enforced by a court because the trust exists for his or her benefit. In short, the beneficiary receives the benefits of the trust while the trustee holds the title and duties.

The “trust principal” is the property placed in trust by the grantor which the trustee holds subject to the rights of the beneficiary and includes any property or anything paid into the trust and left to accumulate. This is commonly called “the corpus of the trust.” Trust earnings are income earned by the trust principal, which may take such forms as interest, dividends, royalties, rents, etc.

Income only trusts are often established by parents who wish to protect their assets from the exorbitant costs of long term care. The name, income only trusts, comes from the fact that the parents are typically entitled to the income that is generated by the trust, but have no rights to the trust principal. From a Medicaid planning aspect, the most important benefit of the trust is that if one of the parents went into the nursing home, any asset that has been transferred into the trust would not be considered a resource when attempting to qualify for Medicaid because the parents have no right to the principal. In contrast, if the asset had not been transferred into the trust, it would typically have to be spent down to a minimal balance before qualifying for Medicaid. Therefore, clients who create income only trusts may be able to have the best of both worlds insofar as they are still entitled to the income from the trust but the principal of the trust would be protected if they were to go into a nursing home.

Moreover, the use of income only trusts allow clients to avoid certain risks associated with making transfers directly to their children without the use of trusts. Before meeting with us, some clients initially think that all they have to do in order to protect their assets from long term care is to simply transfer their assets outright to their children. There are many different potential dangers with such a plan. Most significantly, if a son or a daughter who receives such property or assets outright is involved in a divorce, a lawsuit, has financial difficulty, or predeceases his or her parents, the assets that were gifted to the child outright would be at risk. By using a trust, the parents still maintain some control over these assets until their death. Thus, the perils listed herein would not result in loss of the assets or in unintended consequences in the eyes of the parents.

Typically, many of our clients transfer their homes and a good portion of their assets to the trust. Therefore, they are protecting these assets from expensive long term care costs while also retaining the right to live in their home and receive the income from the assets transferred to the trust. As a result, income only trusts are one of the most useful and popular estate planning tools that are available to our clients.

It is important to note that transfers to income only trusts are considered gifts under the Medicaid laws and are therefore subject to the five year “look-back” period set forth in the Medicaid regulations. Therefore, it is important to establish an income only trust as soon as possible in order to avoid this look-back

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