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Income Only Trusts Becoming Increasingly Popular Tools

“Income only trusts” are becoming increasingly popular tools to protect assets from nursing home and long-term care costs. Trusts are legal arrangements that involve property and ownership interest.

A trust is a property interest wherein assets held by an individual called the trustee, to use the property for the benefit of another (the beneficiary).

The grantor is the individual who establishes the trust and then provides the trust principal.

The trustee is the person or entity who holds legal title to the property for the use or benefit of another. In the case of income only trusts, the trustee typically has no legal right to revoke the trust or use the property for his or her own benefit.

The trust beneficiary is the person for whose benefit the trust exists. A beneficiary does not hold legal title to the trust property, but does have an equitable interest in it. As an equitable owner, the beneficiary has certain rights that will be enforced by a court because the trust exists for his or her benefit. The beneficiary receives the benefits of the trust while the trustee holds the title and duties.

The trust principal is the property placed in trust by grantor which the trustee holds, subject to the rights of the beneficiary and includes any trust or anything paid into the trust and left to accumulate. Typically the assets transferred to the trust are the grantor’s home and other assets that the grantor has accumulated in their lifetime and wishes to protect from long-term care expenses.

Trust earnings are income earned by the trust principal, which may take such forms as interest, dividends, royalties, rents, etc.

Typically, income only trusts are established by parents who wish to protect their assets from long-term care. They derive their name, income only trusts, because the parents are typically entitled to the income that is generated by the trust, but have no rights to the principal. Accordingly, if one of the parents went into the nursing home they would be able to legally say that the principal included in the trust is not to be considered a resource, which normally has to be spent down before qualifying for Medicaid, because they have no right to the principal. Thus, often times clients who establish income only trusts have the best of both worlds insofar as they are still entitled to the income from the trust but the principal of the trust is protected if they go into a nursing home.

Additionally, the use of income only trusts allow clients to avoid certain “risks” associated with making transfers directly to their children without the use of trusts. Some clients come to the initial meetings at our firm with the thought that in order to protect their assets from long-term care they simply will just transfer their assets outright to their children.

There are several hazards with outright gifts. Most significantly, if a son or a daughter who receives such property outright is involved in a divorce, a lawsuit, has financial difficulty or predeceases his parents, the assets that were gifted to this child outright would be at risk.

By using a trust, the parents still maintain some control over these assets until their death. Thus, the perils listed above will not result in loss of the assets.

Once again, many of our clients transfer their homes and a good portion of their assets to the trust. Therefore, they are protecting these assets from long-term care costs but retain the right to live in their home and receive the income from the assets transferred to the trust.

Finally, many of our clients find such trusts an excellent way to protect the future royalties they will be entitled to receive from their oil and gas leases.

It is important to note that transfers to trusts are considered gifts under the Medicaid laws and therefore are subject to the five-year “look back” set forth in Medicaid regulations. Therefore, if one is going to establish a trust, they should do so as soon as practical.

Jeff Rokisky is a partner in Rokisky, Wilharm, Blair & Rokisky, a firm of elder law attorneys with offices in Wheeling and Weirton. If you would like to submit a question for publication, email it to rrokisky@rokiskylaw.com.

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