Irrevocable Income-Only Trusts for Fortune 500 Employees and Retirees

What Is It?

Many Fortune 500 employees and retirees with whom we speak are unfamiliar with Irrevocable Income-Only Trusts. Therefore, we must first address the question of what it is before we can explain its usefulness and determine if it is appropriate for your specific situation.

What Is an Irrevocable Income-Only Trust?

A non-revocable income-only trust may enable an applicant to qualify for Medicaid while preserving assets for family and other beneficiaries. It is a legally binding agreement that allows you to transfer property to someone else (the trustee) who will retain it for you (the beneficiary of the trust). Although you are named as a beneficiary of the trust, you are only eligible to receive the income; you have no access to the trust principal.

How Can This Trust Help You Qualify for Medicaid

To be eligible for Medicaid, both your income and the value of your assets must fall below certain (state-specific) thresholds. The inaccessibility of a portion of your assets (the trust principal) allows you to qualify for Medicaid thanks to an irrevocable income-only trust. In the case of an irrevocable income-only trust, the trust principal (but not the trust income) will not be counted because it is genuinely inaccessible to the Medicaid applicant. The majority of the income from the trust must be used to subsidize your nursing home care; Medicaid will cover the remainder. This allows Fortune 500 employees and retirees who would not normally qualify for Medicaid to receive benefits.

Can Using This Trust Cause Any Problems?

When using this type of trust, Fortune 500 employees and retirees may encounter certain problems. Transfers to an irrevocable trust result in a waiting period or period of ineligibility prior to eligibility for Medicaid. In the event that you transferred assets to an irrevocable trust during the 60-month look-back period, you would be subject to a period of ineligibility (based on a state-mandated formula) prior to receiving Medicaid benefits.

When Can It Be Used?

Timing is a crucial consideration for Fortune 500 employees and retirees who wish to use this type of trust to qualify for Medicaid.

You Want To Preserve Otherwise Countable Assets, And You Anticipate The Need For Long-Term Care

The income-only irrevocable trust helps you qualify for Medicaid. It is used when you anticipate needing long-term nursing home care in the future and wish to preserve your assets in advance. Because transfers to an irrevocable trust are subject to a 60-month look-back period, such transfers will delay your eligibility for Medicaid benefits. Therefore, the timing of the transfer and the ability to anticipate when Medicaid benefits may be required are essential considerations.

Caution: Some states prohibit a "spend-down" of income due to a limit on income. In such situations, if even one dollar of income from an irrevocable income-only trust exceeds the income limit, the applicant could be deemed ineligible for Medicaid benefits.

Although an irrevocable income-only trust is a crucial planning tool for many individuals who anticipate requiring long-term care, it is not appropriate for everyone. For instance, because extremely affluent individuals can afford the cost of long-term care, it makes little sense to transfer funds to such a trust; the monthly income of the trust would likely be sufficient to cover nursing home expenses.

Strengths

Potentially Preserves Them for Loved Ones

Nursing home care is costly and can quickly deplete your assets. A non-revocable income-only trust may allow you to qualify for Medicaid benefits while preserving some assets for your loved ones.

Example(s): Assume that Robert transfers all of his assets to an irrevocable income-only trust, identifying himself as the income beneficiary and a third party unrelated to him as the trustee. Robert may under no circumstances receive principal from the trustee. Six years later, Robert enters a nursing facility and applies for Medicaid. Robert will likely qualify for Medicaid and will have transferred his protected assets to his daughter prior to his demise. Any income payable to Robert is considered his actual income for purposes of Medicaid.

Provides You with a Present Income Stream

Because such a trust is frequently established well in advance of entering a nursing home, it is frequently necessary to provide a sufficient flow of income to cover normal living expenses during the interim. In contrast to a straightforward irrevocable trust (in which the creator is not a beneficiary and cannot access either principal or income), the income-only version offers greater flexibility. In addition, even when applying for Medicaid, a certain quantity of recurring income is allowed. Only amounts above the allowance must be spent on care. Upon entering a nursing facility, many Fortune 500 employees have found a steady income stream to be incredibly beneficial.

Specifies Where the Trust Principal Goes After Your Death

When establishing the trust, you determine who will receive the income. You could designate yourself, your spouse, and one of your children as present beneficiaries, for instance. In addition, you can stipulate what occurs to the principal of the trust upon your demise. This ability to control the money after death is essential to some individuals.

Tip: Because this is an irrevocable trust, your decisions cannot typically be altered once the trust has been established.

Avoids Probate

Probate proceedings can be costly and time-consuming. If all of your assets are held in a trust, probate can be avoided and your assets will be distributed without undue delay.

May Postpone Federal Gift and Estate Tax

With a special testamentary power of appointment, you include a provision in your trust document reserving the right to name in your will the beneficiaries of the remainder of the trust (from a specified group, such as your children). According to federal tax law, you have not completed the gift of the property at the time of the transfer to the trust if you reserve the right to designate who will receive the property at a later date.

Consequently, federal gift and estate taxes are avoided upon transfer. Due to the fact that you retain the right to receive income from the irrevocable trust during your lifetime, the full value of the trust property may be subject to federal gift and estate tax at the time of your death.

Tradeoffs

Before engaging in this form of trust, Fortune 500 employees and retirees should consider a number of trade-offs. 

Control Over Your Assets Is Lost

This trust necessitates a loss of control, which is one of the greatest drawbacks for Fortune 500 workers and retirees. In order for the trust to be an effective Medicaid planning instrument, it must be irrevocable. This means that once you have created the trust provisions and transferred your assets to the trust, you have no further control over the money and assets and are unable to modify or dissolve the trust. This can be a significant issue if you establish the trust many years before entering a nursing home, as your assets will be frozen in perpetuity. Because of this, it is probably not a smart idea to transfer all assets to the trust. However, these Fortune 500 employees should review the following section for a possible remedy to a family financial emergency.

A Substantial Waiting Period Can Cause Problems

Also affected by the waiting period are Fortune 500 employees and retirees. The Medicaid look-back period for irrevocable trusts is sixty months, and the value of assets transferred to the trust will determine how long you must wait before receiving Medicaid benefits. Therefore, protection of costly assets will aid in extending the waiting period.

In addition, if you establish an irrevocable trust and become ill prior to the end of the look-back period, you will be unable to pay your nursing home expenses, and Medicaid will not cover the costs in the interim. For this reason, it is advisable to retain a portion of your assets outside of the trust or to purchase long-term care insurance to cover the waiting period.

Might Be Ineffective In an Income-Cap State

If the periodic income you receive from the irrevocable income-only trust exceeds a certain threshold, your trust may be ineffective in a state with an income limitation. A number of states presently limit Medicaid eligibility to those with incomes below a certain threshold. If you reside in such a state and your monthly income exceeds the threshold, you will not be eligible for Medicaid benefits. In states without an income limit, however, your eligibility would not be affected; you would simply spend down your excess income on medical care.

Is Ineffective If Your Net Worth Is Especially High

High-net-worth Fortune 500 employees are not good candidates for irrevocable trusts. In fact, if you are extremely affluent, it is useless.

Example(s): Consider Alice's transfer of $1,000,000 to an irrevocable income-only trust. Alice could more than afford the cost of a $3,000 per month nursing home on her own, even with a 6 percent return on the trust, because she would receive $5,000 per month. Thus, Medicaid would not be required to pay for her nursing home expenses. Moreover, she would forfeit control of the trust principal.

The Trust's Ability to Preserve Assets Varies By State

Although an irrevocable income-only trust can typically shield assets from the state while you are alive and preserve them for your loved ones after your death, this type of trust is not always effective; certain states can still appropriate a portion of your trust.

Federal law permits states to employ an expanded definition of for Medicaid lien purposes; this definition may encompass both probate and non-probate assets (to the extent of your legal interest in these assets at the time of death). Consequently, if you are the income beneficiary of an irrevocable income-only trust, the state may be entitled to claim the present value of your income interest at the time of your death as reimbursement for the money it provided to you over the years.

The Trust Property May Be Includable In Your Estate for Federal Gift and Estate Tax Purposes

Since you retain the right to receive income from the irrevocable trust during your lifetime, the full value of the trust property may be subject to federal gift and estate tax. Nevertheless, your applicable exclusion amount will shield a certain amount from taxation.

How to Do It

If you are interested in establishing an irrevocable income-only trust, you must take the following steps:

Gather Your Information

1. Prepare a list of all your assets (and those of your spouse) that includes the manner in which title is held, the tax basis, and the purchase price.

2. Prepare an inventory of all of your (and your spouse's) sources of income.

3. Indicate whether your resources are exempt, not exempt, or inaccessible for Medicaid purposes.

4. Compile an inventory of all assets that have been transferred within the past five years, whether by gift, trust, or otherwise. Indicate the transfer date, recipient, purpose, and consideration (what you received in exchange).

Consult A Medicaid Law Attorney

We advise all Fortune 500 employees and retirees who are contemplating establishing this type of trust to consult with an attorney specializing in Medicaid law. Medicaid laws have endured a number of changes in recent years. Given that certain planning vehicles have been eliminated and the majority of rules have been tightened, it is reasonable to anticipate that additional changes will occur in the coming years. If Fortune 500 employees are interested in establishing an irrevocable income-only trust, they must seek the advice of an attorney who has experience with Medicaid planning.

A lawyer will advise you on your options, make recommendations, and draft the trust document that meets your requirements the most effectively. In addition, your attorney should annually evaluate your situation to ensure that family circumstances (or a newly enacted, retroactive law) do not necessitate a change in planning.

Ascertain Your Cash Flow Needs

Due to the irrevocable loss of access to the trust's principal, you must ensure that your current cash requirements will be met through the receipt of trust income and/or the use of other non-trust assets. It is impossible to predict when or if you will require the services of a nursing home; therefore, it is essential to maintain sufficient assets to cover your normal living expenses in the interim.

In addition, because a transfer of assets to a trust during the look-back period will result in a period of ineligibility before you are eligible for Medicaid assistance, you must retain sufficient funds to pay your own nursing home bills if your health deteriorates unexpectedly during the look-back period.

Tax Considerations

Income Tax

Since an irrevocable income-only trust is a grantor trust, the entire income is taxable to the grantor (trust originator). If you (the grantor) or your spouse are a beneficiary, the trust does not pay its own income tax.

Federal Gift and Estate Tax

With a special testamentary power of appointment, you include a provision in your trust document reserving the right to name in your will the beneficiaries of the remainder of the trust (from a specified group, such as your children). According to federal tax law, you have not completed the gift of the property at the time of the transfer to the trust if you reserve the right to designate who will receive the property at a later date.

Consequently, federal gift and estate taxes are avoided upon transfer. Due to the fact that you retain the right to receive income from the irrevocable trust during your lifetime, the full value of the trust property may be subject to federal gift and estate tax at the time of your death. However, your pertinent exclusion amount will shield a certain amount.

Questions & Answers

When deciding to establish this type of trust, a number of Fortune 500 employees are likely to have the following questions.

What Are The Consequences When The Trustee of an Irrevocable Income-Only Trust Has Discretion to Give Both Income And Principal to The Donor-Beneficiaries But Chooses To Give Only Income? Will The Beneficiary Still Qualify For Medicaid?

The trust must expressly prohibit an invasion of the principal for the applicant's benefit. Creditors (including the state) can reach the utmost amount of money that the trustee could have paid to the beneficiary under the terms of the trust.

Consequently, if the trustee has the discretion (or authority) to distribute trust principal to the beneficiary, the principal will be considered an accessible resource, even if it was never actually distributed. This could disqualify you from Medicaid eligibility.

If Income From an Irrevocable Income-Only Trust Is Paid to a Husband And Wife Jointly, Is It True That The Healthy Spouse Is Entitled Only to One-Half of The Income When The Institutionalized Partner Applies For Medicaid?

In certain nations, however, there exists an opportunity for planning.

Tip: Regarding a married couple, an irrevocable income-only trust can stipulate that income will be distributed to both spouses until one spouse enters a nursing facility. At that time, the institutionalized spouse will no longer receive income distributions, and all income will be paid to the healthy spouse for life, followed by the survivor for life. Upon their deaths, the trust will terminate and the remaining balance will be distributed to the trust's beneficiaries. As transfers between spouses are permissible, there is no penalty for such an arrangement. However, in the absence of such a provision, the healthy spouse may only be entitled to half of the income after the other spouse has entered a nursing home and applied for Medicaid.

If You Foresee A Need For Long-Term Nursing Home Care In The Near Future, Should You Transfer All Of Your Resources To An Irrevocable Income-Only Trust And Simply Live on The Income?

Most likely not. Transfers into an irrevocable trust within 60 months of your nursing home admission and Medicaid application will result in a waiting period or period of ineligibility before you can begin receiving benefits. The lengthier the waiting period, the more valuable the asset. Therefore, it is prudent to retain sufficient assets to cover your nursing home expenses (if necessary) until the waiting period expires and Medicaid coverage begins.

If You Transfer Cash Into An Irrevocable Income-Only Trust, When Will You Be Eligible to Collect Medicaid Benefits?

It depends on whether or not the transfer took place during the period. If the transfer occurred outside of the look-back period, you would be promptly eligible for Medicaid (assuming all other requirements are met). However, your eligibility for benefits may be delayed if the transfer occurred during the look-back period.

Example(s): Suppose Ralph used $144,000 to establish an irrevocable income-only trust, designating himself as the beneficiary and his son as the trustee. Although Ralph is entitled to receive all of the trust's income, he is not permitted to receive any principal. Ralph entered a nursing home and applied for Medicaid two years later. The estimated monthly cost of nursing facility care in his state is $3,000. Because Ralph transferred assets to a trust during the "look-back" period (60 months), he is ineligible for Medicaid for 48 months ($144,000 divided by $3,000 equals 48 months).

What If A Family Crisis Occurs Sometime After You Establish The Income-Only Irrevocable Trust? Is There Any Way To Access Principal If You Need Substantial Cash?

It is conceivable to incorporate a sort of into the trust's terms. In the case of a married couple, for instance, the trust could allow the trustee (a third party) to make sporadic distributions of trust principal to the couple's offspring. The trust could be terminated (by the trustee distributing the entire principal) if family circumstances so required. Notably, a trust established during the period cannot be used as a personal bank. Medicaid will examine a beneficiary's bank account deposits and consider excessive deposits (gifts from relatives) as evidence that the irrevocable nature of the trust was illusory.

According to a study published in the Journal of Elder Law and Estate Planning, it is important for Fortune 500 employees and retirees to consider the impact of an irrevocable income-only trust on their eligibility for Medicaid. The study found that while the trust can help qualify for Medicaid benefits and preserve assets, transfers to the trust during the 60-month look-back period can result in a waiting period before receiving Medicaid benefits. However, the study also highlighted a possible solution for a family financial emergency. By incorporating provisions in the trust's terms, the trustee may have the authority to make sporadic distributions of trust principal to the beneficiaries in case of a crisis. This provides some flexibility while still maintaining eligibility for Medicaid.

Analogies are a powerful tool for explaining complex concepts in a relatable manner. When considering the concept of an irrevocable income-only trust for Fortune 500 employees and retirees, it can be likened to a fortified vault with a special key. Imagine your assets as valuable treasures that you wish to protect for the future, while also ensuring your eligibility for Medicaid. The irrevocable income-only trust acts as a secure vault, where you place your treasures, represented by your assets. The trust serves as the lock, keeping the principal inaccessible while allowing you to receive a steady flow of income, represented by the special key. This key grants you financial stability during your lifetime, covering living expenses, just as the income stream does. However, the principal remains safeguarded, protecting your assets from being counted towards Medicaid eligibility. By utilizing this trust strategy, you can secure your treasures, protect your financial well-being, and ensure a legacy for your loved ones, much like a fortified vault with a special key.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

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