The enactment of the Deficit Reduction Act of 2005, which extended the
lookback period for gift transfers to five years, caused elder law attorneys to consider the value of a client transferring
assets to an Irrevocable Income Only Trust (IIOT).
is an irrevocable trust that can pay income only to the Grantor. It cannot pay principal to the Grantor under and circumstances.
If assets are transferred to a Revocable Trust, there is no transfer of assets for Medicaid eligibility because the Grantor still retains control over the
assets. In contrast, a transfer to an irrevocable trust is a transfer to the extent that assets are no longer available
to the Grantor. As such, transfers to an IIOT are subject to a five-year lookback.
The advantages of creating an Irrevocable Income Only Trust (IIOT) are as
The assets in the trust
will be protected from the nursing home (after 5 years)
The assets in the trust will avoid probate
Your heirs will receive a stepped-up basis in the property, which allows them to sell the property tax free after
Income tax reporting will be
the same - you will still be able to claim your real estate taxes, mortgage payments (if any), insurance and repairs on your
individual 1040 tax return
If you sell
the house, you will still be able to receive your capital gains exclusion of $500,000 (married) or $250,000 (single)
You will be the Grantor or creator of this trust, but YOU WILL
NOT be the Trustee. You will be able to receive all income from this Trust, but you will not be able to touch the principal.
assets should you put into the IIOT?
Your house, rental property or other assets can be transferred to this just. Just
remember, any assets that are placed in this trust are no longer controlled by you.
What if I want to sell my house
or other asset after it has been transferred to the IIOT?
The 5 year look-back period begins to run from the day the
asset is transferred into the trust. As such, if after 3 years, you decide to sell your house, then the Trustee will
sign the deed to transfer your house to the third party. The Trust will then have cash that can be invested into a new
home or CD's or any other investment. However, the new investment MUST remain in the name of the trust. Therefore,
you have not given up the 3 years that have previously passed. You would then have 2 years left on the look-back period
for the new investment.
An IIOT also avoids the following risks which can occur by making outright
gifts directly to your children or to other heirs.
(1) Claims of Creditors
- outright gifts to children or other heirs are subject to the claims of their own creditors. The assets in the IIOT
are owned by the Trust and are not reachable by creditors.
- outright gifts to children or other heirs may be lost if the person who is gifted the property is in the process of or eventually
gets a divorce. The assets of an IIOT may not be considered marital property in the event your child or other heir gets
divorced (depends on State Law).
(3) College Financial Aid - if your child
or heir to whom assets have been transferred is applying for financial aid, the assets gifted to them will affect their qualifying
for such aid. However, the assets in the IIOT will not affect qualifying for such aid even if the child or heir is the
trustee of your trust.
Click Here to View Differences Between Revocable and Irrevocable Trusts