Is an IDIOT Trust ever a smart estate planning choice?

By Gina M. Barry, Esq. Partner, Bacon & Wilson. P. C. Special to PRIME When it comes to protecting assets from nursing home costs, many believe the solution is to place those assets in a trust. In some circumstances, establishing the type of trust required to obtain asset protection may carry great risk. Nonetheless, in the right circumstances, a smart choice could be the IDIOT Trust. What is an IDIOT Trust? An IDIOT Trust is an Intentionally Defective Income Only Trust. As the name suggests, this trust will provide you only with income. A home is the most common asset placed in such a trust. When your home is placed in the trust, income may be received in the form of rent, or there may be no income generated at all. When other investments are placed in the trust, those accounts will generate interest income. All income is paid to you as the person who established the trust. IDIOT trusts, taxes and inheritances The intentional defect in this trust is that the trust will be ignored for income tax purposes. Income generated from trust assets will be taxed on your personal income tax return, as it was before you placed the asset into the trust. In addition, upon a sale of a home within the trust, you may be able to take advantage of beneficial capital gains tax exclusions. Any assets placed within this trust will pass to your beneficiaries upon your death without probate. Further, the assets may continue to be held in ongoing trust for your beneficiaries. An IDIOT Trust is an irrevocable trust that can not be revoked or amended. Once an asset is placed in this type of trust, it can never be removed (or purchased back) from the trust for less than fair market value. If you place your home into the trust, and you later wish to sell it and purchase another home, you may do so, but only via the trustee. The trustee is responsible for managing and investing assets held in the trust. You should not be the trustee; in order to reap the benefit of this type of trust, you must be willing to give up control of the assets placed in the trust. If you retain too much control, the asset protection feature of this trust will not be effective. IDIOT trusts and Medicaid An IDIOT Trust protects assets from nursing home costs by making these assets inaccessible. Trust income will be available to pay these costs because it will always be paid to you. Since there is no right to receive any of the principal (the assets initially placed in the trust), the principal can be protected. This rule intertwines with rules for the Medicaid program, which pays nursing home costs for applicants that qualify for benefits. In order to qualify for Medicaid benefits, you must meet specific asset limits. Assets held in an IDIOT Trust will not be counted toward the asset limit because of their inaccessibility. However, the Division of Medical Assistance ("DMA") will "look back" five years from the Medicaid application date to determine if you have made any gifts during those years. Assets transferred to an IDIOT Trust, are considered a gift. If the DMA finds gifts were made during the look back period, the applicant will be disqualified from receiving benefits for a set period equal to the number of years since the gift was made, even if they are otherwise eligible to obtain benefits. However, if the gift was made at least five years and one day prior to application, that gift will not have to be reported. During the five-year period between establishing a trust and applying for benefits, you need to self-pay for care such as a nursing home, which in Massachusetts is approximately $9,000 per month. Thus, individuals must have enough assets outside of this trust to pay for care if they need to enter a nursing home within five years of the transfer. An IDIOT Trust is a sophisticated estate planning technique that should not be utilized without the assistance of an attorney who specializes in this area of law. Your estate planning specialist can help you determine whether an IDIOT Trust is a smart choice for you. Gina M. Barry is a Partner with the law firm of Bacon Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of Estate and Asset Protection Planning, Probate Administration and Litigation, Guardianships, Conservatorships and Residential Real Estate. Gina may be reached at (413) 781-0560 or gbarry@baconwilson.com.