DEFINITION of 'Irrevocable Income-Only Trust (IIOT)'

An irrevocable income-only trust is a type of living trust often used for Medicaid planning. It protects assets from being sold to pay for nursing home and other long-term care expenses, so that the assets can be passed on to beneficiaries. (A beneficiary – any person or entity who receives the assets of a trust, will, or life insurance policy – is often a family member although s/he may also be a close friend or even a charitable organization.)

Once assets are transferred into the trust, the law places certain restrictions on their use. However, the grantor retains the right to any income that the trust assets generate. The grantor also has the right to use, live in, and sell any real estate held in the trust, as well as buy another property with the proceeds of any sale.

BREAKING DOWN 'Irrevocable Income-Only Trust (IIOT)'

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.

IIOT and Other Forms 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 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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