August 20, 2014










The Irrevocable Income Only Trust

A Case Study in protecting your assets against the cost of long term care

Mr. and Mrs. Watson are in their mid-seventies. Mr. Watson recently fell and injured his hip. He is home from re-hab and is doing better, but may require assistance in the coming years. Additionally, Mrs. Watson has just been diagnosed with the onset on Alzheimers. They own their house (valued at $550,000) on Long Island and have a nice nest egg of about $400,000 in investments and savings. They also receive a combined $3,700 per month in income from social security, Mr. Watson’s pension and income from their investments. They can comfortably live off of their income and do not need to touch the principal of their savings. Their children are concerned with how they can protect their assets while receiving the care they will require in the future.

Their situation is common to many seniors on Long Island. The solution – The Irrevocable Income Only Trust (IIOT). In simplest terms, a Trust is private agreement used to achieve various estate planning goals. There are many kinds of Trusts – the most common being Revocable and Irrevocable. The Irrevocable Trust, as it’s name implies, cannot be altered, modified, amended or revoked. Then why do it?

Simple – if your situation is similar to the Watson’s, the Irrevocable Trust is most often the best way to protect assets against the cost of long term care (cost of home health aide or nursing home).

Here’s how the IIOT would work for the Watson’s. Mr. and Mrs. Watson would create the Trust (they are called the Settlor’s) and appoint one of their two children as Trustees. The Trust would have a name, just as any company has a name. It may be called the “Watson Family 2010 Irrevocable Trust”. Then they would transfer the deed to their house to the Trust. Although they technically do not own the house, the Watson’s would still receive all tax breaks associated with property ownership, such as a property tax deduction or veteran’s deduction. The Trust terms would also stipulate that the Watson’s can live in the house for the remainder of their lives.

The Watsons are considering selling their house in 1 year to buy a condo. The good news is that the Trustee can sell the house for them and buy the condo with the proceeds. The remaining proceeds as well as any of their other investments can also be owned by the trust. The principal remains in the Trust and the income generated (dividends from stock, interest from CD’s, etc..) will continue to go to the Watsons. This is important because they need currently rely on that income. By creating the Irrevocable Trust and transferring assets to the Trust, the assets are protected from Medicaid because the Trust is Irrevocable. By giving control of the assets to one of your children, you are protecting the assets.

If you require the assistance of a home health aide in New York, the assets are protected immediately. This means that, assuming you have protected all of your assets, you would qualify for Medicaid benefits. To be eligible for Institutional Medicaid (Nursing home), you have to do this planning 5 years before applying for Medicaid (The Deficit Reduction Act of 2006 (DRA) imposed a five year look back period on asset transfers).

Typically, I would not advise my clients to transfer all of their assets to the Trust. That would be a big step for most. Fortunately, you can continue to transfer assets down the road.

Protecting assets against the cost of care is important. Most of my clients are like the Watson’s. They want to ensure that their assets are protected and would rather their children inherit than the money go to a nursing home. Though important, this planning must also be done with the counsel of trusted advisors.

With questions about how the Irrevocable Trust can be used to protect your assets, please call this office for a free consultation at 516-605-0625, or contact us online.

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