Saving the Family Farm from the Nursing Home

The annual cost of nursing home care in Ohio can be more than $100,000, and is likely to increase with every passing year. That’s an unbearable financial burden for most families, including families that farm. When the expense of nursing home care arises, some families find that the only way to meet that expense is by selling part of the land they had intended to pass down to their children. With proper planning, saving the family farm from the nursing home is possible.

For families that have farmed for generations, the land is more than just an asset that can be liquidated; it’s a legacy to be cherished and passed down. And, of course, family farms benefit their communities, creating jobs, food security, tax revenue, and preserving local traditions. In short, family farms matter. In this blog post, we will discuss how nursing home expenses threaten family farms, and how families can protect and pass on the legacy they have built.

Saving the Farm from Nursing Home Costs: What’s at Stake

The great majority—about 98%—of farms in the United States are family farms, and about 95% are small or midsize family farms. When farmland must be sold off to pay for nursing home expenses, the sale is often not to other small farmers, but to developers or even large corporations. That’s a loss to the community, but the greatest loss is, of course, to the family.

At one time, estate taxation posed a greater threat to family farms than it does today, as farmland had to be liquidated to pay taxes on the non-exempt part of the estate upon the owner’s death. In recent years, the estate tax exemption (also called the lifetime exemption amount) has increased to more than $13 million per person, meaning that fewer family farms are subject to estate tax. Rising nursing home costs have become a greater threat.

Federal financial help is available through state-administered Medicaid programs to pay for nursing home care. Unfortunately, that aid is only available to individuals who have first “spent down” their own countable assets to pay for their care. The need to spend down assets to qualify for Medicaid can force families to sell their farmland.

Farmers who were hoping to pass on the farm to the next generation may think about transferring the land and farm business to family members to avoid the need to spend down those assets—but the government is one step ahead. There is a five-year “look back” period from the point of a Medicaid application. If the applicant transferred assets to anyone, including family members, for less than fair market value during that time, it could result in a delay or denial of Medicaid eligibility. (Furthermore, an outright transfer to a family member during the owner’s life can result in a loss of the step-up in basis for the asset upon their death.)

Even if an applicant qualifies for Medicaid assistance, in many cases, Medicaid can recover from an individual’s estate after their death for Medicaid payments on that person’s behalf. This is called Medicaid estate recovery, and it, too, can pose a threat to the next generation’s ability to inherit the family farm.

Between the need to spend down assets to qualify for Medicaid, the Medicaid look-back period, and Medicaid estate recovery, it’s hard to protect farm assets without proper planning. Working with an experienced farm business and estate planning attorney is the best way to prevent nursing home costs from being covered by the family farm.

Options to Protect the Family Farm from Nursing Home Expenses

Fortunately, you can protect farm assets for your family and receive a step-up in tax basis if you take the proper measures before you need nursing home care. The Medicaid spend-down requirements and look-back period aren’t intended to prevent individuals from getting assistance or from leaving an inheritance; they are designed to prevent fraud. Accordingly, if you work within the right legal framework, you can keep your family farm in the family while complying with Medicaid requirements.

Creating manager-managed limited liability companies (LLCs) to own and operate your family farm can help protect farm assets not only from the nursing home, but from other future creditors as well—while giving some control to the current owner. It’s important to note that an LLC itself does not keep the farm out of reach of the nursing home, but it is a critical component of your overall asset protection plan for the farm. When your farm is owned by an LLC, your personal assets are kept separate from farm assets.

Farm planning experts oftentimes advise creating two LLCs for your farm if you are actively engaged in farming; one to act as a holding company for farm assets, and the other as an operating company for the farm business. The operating company leases assets from the holding company, but the operating company itself does not own assets other than a checkbook and farm outputs, further shielding it in the event of liability.

Having a type of trust known as a Medicaid Asset Protection Trust (MAPT) own the LLCs is how protection from the nursing home comes into play. A MAPT is irrevocable, which means that once you place assets into it, you cannot take them back directly; they are completely within the control of the trustee of the trust. However, removing assets from your control also means that those assets are not “countable” for purposes of Medicaid eligibility. Assets in a MAPT also cannot be reached by Medicaid estate recovery, which means that they remain in the trust for the use of your family.

Contact the Farm Planning Experts at Dayton Estate Planning Today

This brief explanation sounds simple enough, but properly executing this farm protection plan is complex. Errors could result in the loss of farm assets and much of what you have worked for. To create a plan for the protection of your family farm, and to make sure it is implemented correctly, work with an attorney who has extensive experience with these arrangements. To learn more about saving your family farm from the nursing home, contact Gudorf Law Group to schedule a consultation.