Irrevocable Income Only Trusts (IIOTs)

Jun 21, 2022

Anyone who has had a loved one in a nursing home knows how costly nursing home care can be and how quickly assets can be depleted to cover such expense. Eventually, most seniors remaining in a nursing home on a long-term basis will need to apply for Medicaid to cover such costs. However, this can only be done after most of their assets have been paid directly to the nursing home.

A single person in need of nursing home care must spend their liquid assets, including all money in bank accounts, all retirement plan assets, the cash value of any life insurance policies, and any stocks, bonds, or other investment assets, down to $2000.00. They will also likely have to sell their house unless they can return to it within a relatively short period or transfer it using one of the exemptions in the Medicaid regulations.

A spouse with their husband or wife remaining outside the nursing home is slightly better off but must still spend what likely amounts to a majority of their assets before becoming eligible for Medicaid. Thus, nursing home care, without proper planning, can mean the depletion of assets obtained over many years through hard work and diligent saving. People are often curious about how one can attempt to protect their assets from this dreadful fate. One way is to execute and fund an “Irrevocable Income Only Trust” or IIOT.

As mentioned above, when applying for Medicaid, an applicant can have only minimal assets. Additionally, when using MassHealth, the body governing Medicaid here in Massachusetts will request five years’ worth of financial records to ascertain whether assets have been transferred within that period. If so, a disqualification period will ensue unless the transfer is cured.

Most of the time, people are interested in protecting their principal residence. If the five-year window is still available, one option to protect assets is to transfer them into the IIOT. The way it works is that the trust is drafted and executed by the trustors, and the property is deeded into the trust. Once the five-year period goes by, the house, and other property in the trust, will be protected from exposure to MassHealth. Of course, there are some drawbacks to taking this action.

For the IIOT to function as it should, the original owners of the assets in the IIOT have essentially no control over those assets. Unlike the more common revocable living trust, the person setting up the IIOT may not be the trustee. This is because if the original owner is the trustee and therefore in control of trust assets, those assets will be considered “available” for payment to the nursing home. This is a significant issue for some folks who do not want to lose control of their house or give their child the final say on whether it is sold. Additionally, because someone other than the person setting up the trust is not the trustee, we generally advise that financial assets not be put into the trust.

While the issues detailed above can be a deterrent to some people, we also have clients who have a child or children who they trust enough to put them in the position of controlling their assets. For many, the idea of protecting their home, which may be their most valuable financial and emotional asset, is enough incentive to take action and establish an IIOT. And as stated above, if you transfer the asset into the trust and the five years are met, the asset will be protected from payment to a nursing home.

Of course, as with any topics we discuss in this forum, there are complications beyond the scope of this article. Working with an attorney who is informed of the law surrounding these issues is essential. We would be happy to meet with you if this is something that you would like to discuss in further detail.