Today, I attended a seminar presentation lead by leading national asset protecting and Medicaid planning attorney Even Farr. I’ve included some of my notes from the call on Income Only Trusts for Medicaid planning and asset protection.
Income only Trusts are a pre-planning tool that can replace the need for long term care insurance. The Income only Trust is a self-settled, irrevocable trust, where a Settlor retains right to income only and the settler must not have the right to the principal of the trust under any circumstances. So what does that all mean?
So what does Irrevocable mean? It means cannot be revoked unilaterally be the Settlor. Termination by all parties is allowed under common law, including Section 411 of the Uniform Trust Code. Additionally, there can be access to principal through termination (consent of all interested parties) or through distribution of principal to the remainder beneficiaries who my voluntarily use for the benefit of the Settlor.
What is income? Income means interest, ordinary dividends, rental income and any other taxable income that does not qualify for capital gains treatment.
What are some of the benefits? First creditor protection. Once an asset is transfererd into the Income only Trrust, it’s protected immediately from creditors.
The basic logic of the trust is that clients can convey a present absolute estate to their children or anyone else they wish to transfer assets to. Clients can convey an estate in remainder. With both, you have the same resutls, i.e., the assets don’t belong to the client and are therefore protected from the client’s creditors (assuming there is no fraudulent conveyance).
What does “Self-Settled” mean? The secret is that the term “self-settled” term as used by the general asset protection community to describe an irrevocable trust with the settlor as a beneficiary as income and principal. The Income only Trust, obviously, only allow access to income, not principal.
Settlors retained controls. Settlor can be the trustee, can change the trustee, can change the beneficiaries, receives all the income, and may have indirect access to principal.
Why these work for Medicaid? It has been permitted since OBRA ‘93 and was latter clarified in the Richardson letter in 12/23/1993.
-Christopher J. Berry, Esq. is a Michigan elder law attorney, a Veterans Administration Accredited attorney, a member of the National Academy of Elder Law Attorneys (NAELA), a member of ElderCounsel, and practices elder law, medicaid planning and Veterans Benefits planning in Bloomfield Hills, Michigan. He can be contacted at (248) 971-1700 or online at www.witzkeberry.com. Visit his Michigan Elder Law Website at: Michigan Veteran and Elder Law Firm.