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Irrevocable Income-Only Trust (IIOT) Definition
An irrevocable income-only trust is an estate planning tool used for Medicaid planning. It allows donors to protect their assets from being auctioned to pay for nursing home care expenses. This way, the assets can be transferred to the beneficiaries.
Note that once the assets are in the trust, there are certain restrictions that the law places on them as far as their use is concerned. Also, as the name suggests, once the donor puts the assets in this trust, he or she cannot make any changes without the beneficiary’s permission.
A Little More on What is an Irrevocable Income-Only Trust (IIOT)
Note that the corpus of the trust is not counted as a resource for Medicaid purposes so they can be transferred onto the grantor’s heirs. However, the grantor of the assets retains the right to all the income that the trust assets generate. The grantor also has the right to live in, use, and sell any real estate held in the trust, and can also acquire other assets using the proceeds from the sale.
Why IITO Matters
One of the essential features of IIOT is the steady income it generates to the grantor. It is supposed to provide income to its beneficiaries who in this case, maybe the grantor or the donor.
So, if the grantor moves into a nursing home, the income can be used to meet the expenses in the home care. It is important to note that this income is subject to taxation under the federal income tax law which the grantor must pay.
To ensure that irrevocable trust protects your assets completely, you must draft the document carefully. Note that the assets transferred into the trust do not become “countable resources” when it comes to Medicaid eligibility requirements. This is because once the grantor puts assets in this trust, he or she loses the principal ownership rights.
So, once the grantor loses control over assets in the trust, it means that they are safe and the government or a nursing home cannot cease them. IIOT can also offer support for a family member with special needs or disabilities during your lifetime and after your death.
IIOT vs. Other Forms of Trusts
Beside IIOT, there are also other forms of trust like personal trust where a person creates a trust in which he or she is the beneficiary. This type of trust is different from legal entities that have the authority to hold, sell, buy, and manage the property on behalf of their trustor.
Example of an Irrevocable Income-Only Trust
Let’s assume that John decides to set up an irrevocable personal trust to pay for the education of his children. In this case, John, who is the trustor, would create trust using the assets that have been set aside to seed that particular trust purposely.
John could reach out to an estate or trust lawyer to help him in completing the process, together with a custodian and investment advisors. These parties will manage the assets on behalf of John until the withdrawal period.
John is required to work with the investment advisor more often, to come up with an investment policy. The policy is supposed to guide the trust management in meeting its objectives as far as asset trust growth, and income is concerned.
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