Irrevocable Income Only Trust

Key Takeaways

• An Irrevocable Income-Only Trust (IIOT) is a trust used to protect assets from nursing home costs and pass them to beneficiaries.
• The grantor of an IIOT retains the right to any income generated by the trust assets.
• IIOTs are irrevocable, meaning they cannot be altered without the beneficiary’s consent.
• Trust agreements in an IIOT clearly define roles, property, and management, minimizing legal uncertainties.
• Setting up an IIOT can be complex; professional legal and financial advice is often recommended.

What Is an Irrevocable Income-Only Trust (IIOT)?

An Irrevocable Income-Only Trust (IIOT) is a specialized type of living trust primarily used in Medicaid planning to safeguard assets against the high costs of long-term care, such as nursing home expenses. This trust allows assets to be preserved and passed on to designated beneficiaries while allowing the grantor to receive income generated by the assets. Once assets are placed within the IIOT, they cannot be used to pay for care, yet the grantor still retains income rights. Beneficiaries, often family members, inherit these assets without them being depleted by care costs.

How Irrevocable Income-Only Trusts Work

The trust agreement should describe the trust name, trust property, appointment of trustee, appointment of trust protector, power over trust property, when beneficiaries may appoint a successor trust protector, fees and expenses due to the trust protector, the purpose of the trust and the management and distribution of the trust during the grantor's lifetime. By requiring such detail, IIOTs leave little room for doubt and are nearly impossible to break, as long as the trustor was in his or her right mind at the time of the trust's creation.

It should be noted that this form of a trust is irrevocable. An irrevocable trust is one that cannot be modified or terminated without the beneficiary's permission. This is the opposite of a revocable trust, which allows the grantor to modify the trust.

Comparing IIOTs with Other Types of Trusts

Many different types of trusts exist, in addition to the IIOT, such as a personal trust. A personal trust is one that a person creates for him or herself as the beneficiary and can accomplish a variety of objectives. Personal trusts are separate legal entities that have the authority to buy, sell, hold, and manage the property for the benefit of their trustor.

For example, a person may set up an irrevocable personal trust to pay for her children’s education. In this situation, the trustor would create the trust with the assets that she has set aside to seed the trust. She could seek the support of a trust or estate lawyer to complete the process, along with a custodian to hold the assets and additional investment advisors to manage them until it is time for withdrawal. A trustor will often work with an investment advisor to set up an investment policy that will guide the management trust to meet its objectives, such as growth or income.

Charitable lead trusts, bare trusts, and naked trusts are three other examples.

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