December 15, 2019










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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Trusts and Taxes

Grantor Trusts

Any Trust which is created by an individual and where the individual transfers assets to the trust and the assets remain in the trust for the lifetime enjoyment of that individual. The Individual is referred to as the Grantor.

Examples of Grantor Trusts and the various Tax implications of each

Revocable Trust – Trust whereby the Grantor reserves the right to revoke any term of the trust during their lifetime. The grantor transfers assets such as property, investments and savings to the trust. The grantor typically names himself and his spouse as Trustee.

  1. Income Taxes– The grantor typically reserves the right to the income that the Trust generates. This includes rental income from property and dividends and interest from investments. As a result any income generated from the Trust is attributed to the grantor. The Tax ID for the Trust can be the social security number of the grantor or they can obtain an EIN from the IRS.It is possible to create a Revocable were the grantor assigns the income of the trust to another individual, such as a child. In this instance, the income is taxed to that beneficiary.
  2. Gift Taxes – Because a revocable trust can be revoked by the Grantor, it is considered an incomplete gift. As such there is no gift tax implications.
  3. Estate Taxes– Assets transferred to a revocable trust are considered to be part of the Grantors estate. Therefore, the value is added to the Grantor’s total estate and used in any estate tax calculation.A revocable trust can include a Credit Shelter provision or QTIP language. In either scenario, the grantor’s assets will pass to a testamentary trust (Credit Shelter Trusts are also disclaimer trusts – meaning that the surviving spouse has to disclaim the assets for them to pass to the trust). The purpose of establishing these trusts is to limit the estate tax liability.

    An example of how it works: Married individuals are worth $5,000,000. If they did not do anything, and one spouse passed away, the surviving spouse would be worth the entire $5,000,000. Upon their passing, the heirs would be responsible for a potentially large estate tax bill.

    By placing assets into a Credit Shelter or QTIP Trust, the assets of the spouse who passes first remain in their estate for tax purpose. The surviving spouse has limited access to those assets, however, the assets do not pass to children until the passing of the second spouse. Because the “disclaimed” assets remain in the estate of the first spouse, the children benefit from the exemptions of each parent. As a result, in the example above, each estate would be values at $2,500,000. Assuming the Federal Estate Tax exemption is $2,500,000, the children would not be responsible for a federal estate tax (there would still be a NY State Estate Tax). However, if they did not plan, assuming the same numbers, the children would be responsible for approximately $1,000,000 in federal estate taxes upon the death of the second parent.

Irrevocable Income Only Trust (IIOT)– Trust whereby the Grantor does not reserve the right to revoke any term of the trust during their lifetime. It is typically done to protect assets against the cost of long term care (home health aide or nursing home)

  1. Income Taxes – The grantor typically reserves the right to the income that the Trust generates. This includes rental income from property and dividends and interest from investments. Often spouses who create a Irrevocable Income Only Trust would create a joint trust. Therefore, an EIN should be requested from the IRS. However, if it is a sole individual, their SSN can be used.
  2. Gift Taxes – An IIOT is also an incomplete gift when the grantor retains an interest income and a limited power of appointment to change the beneficiaries in their Will. No Gift taxes owed.
  3. Estate Taxes – Cannot include Credit Shelter or QTIP language. All assets included in Taxable estate.

Supplemental Needs Trust – Trust whereby the Grantor places assets into a trust for the benefit of a disabled individual.

  1. Income Taxes – New EIN for the Trust is recommended. A tax return will be done for the Trust because the income does not go to the grantor or beneficiary but remains in the trust.
  2. Gift Taxes – When an individual transfers assets to an SNT for the benefit of another individual, they should file a gift tax return if the yearly transfer exceeds $13,000.
  3. Estate Taxes – Included in the estate of the disabled individual.
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Client Case Study: Be Organized, or else

A few months ago, I met with a client who wished to update his Last Will and Testament and learn how to protect his assets against the cost of Long Term Care. He was widowed, had a partner of 10 years and two children from his previous marriage. He was 85 years old. His assets included his primary residence and modest savings, mostly in the form of CD’s.

He wished to leave his assets to his partner and one of his daughters – disinheriting the other daughter. Because of this – and because he wanted to protect his assets – I suggested that he create an Irrevocable Trust. This would help protect his assets in case he had to be placed in a nursing home or require the assistance of a home health aide. More importantly, perhaps, it would allow his estate to avoid the probate process – especially important when disinheriting a child.

Probate is the process of proving the validity of the will and administering the estate. During this process, all children are asked to be involved by consenting to the appointment of the named Executor – including those who are disinherited. Because he wanted to disinherit a child, I thought that the probate process could be difficult for his partner and other daughter.

He decided to take my advise and create a Trust and then transfer his assets to the trust, including the deed to the house. We began the process by drafting and executing the Trust agreement. Unfortunately, he could not find the deed to his house. He took more time to try and locate the deed, but to no avail could not locate it. We eventually found the deed with the assistance of a Title company.

Unfortunately, before we had time to draft and sign the deed, my client passed away. The house, therefore, was not owned by the Trust. Accordingly, the house would pass through the Will, forcing probate. Because the Will states that one of his daughter is not to inherit, we expect there to be a contested proceeding.

It is all too common for individuals not to know exactly where their important documents are located. Whether they be Wills and Trusts, Powers of Attorney and Health Care Proxies, Deeds and Health Insurance information, or a list of bank accounts, it is important that you be organized and know where everything is located so that when the time, comes there are not unnecessary delays that cause unnecessary problems.