By Aric D. Burch
May 30, 2019
Harry and Sally want to pass their farm operation to their children. Ideally, they would also like to receive some income from the farm. Because Harry and Sally do not have long-term care insurance, they are worried that if they need medical assistance (e.g., Medicaid) to help pay for long-term care such as a nursing home or assisted-living facility, the farm may be at risk.
A few common issues for Harry and Sally to think about follow.
Do they need to plan for the farm if it is a business asset? The good news for Harry and Sally is that business assets are typically exempt assets for medical assistance purposes. Historically, this meant that the value of their farm would not count as an asset preventing them from receiving medical assistance benefits. However, recent policy changes have created some uncertainty. This is especially true for rental property, including rental of acreage or cropland for farming purposes. If Harry and Sally plan to keep some cropland to rent as a way of generating income for their retirement, the cropland may not be exempt. This means the entire value of the cropland would be counted when applying for medical assistance.
PART OF ESTATE
Even if their farm is deemed to be exempt, there is bad news. Any ownership of their farm will be part of Harry or Sally’s estate after their death. As part of their estate, there is a risk that the state will look to recoup the costs it paid for Harry or Sally’s long-term care by filing a claim against their estate that may include a lien. The farm, even if an exempt business asset, may be in danger because the estate must satisfy the state’s claim and/or lien. The estate’s business interest—namely, the farm—gives value to the estate, but liquidity is an issue. If the estate has no other resources to pay the claim, the family will feel pressure to find a way to preserve the farm and generate the cash needed without selling a portion of the farm.
Why not just give the farm to the kids to make sure it is safe? Harry and Sally ask a very popular question. However, there are at least three drawbacks to giving the farm away.
First, if Harry and Sally give their farm to their children, they will be giving away their means to the income they wanted as part of their retirement. Just like many families who have substantial land holdings, their intent is to rent out the cropland to supplement their social security income. If their children own the land, their children would be entitled to the income.
Second, giving the farm away means Harry and Sally will no longer own or control the farm; their children will. The children will determine how to run the farm and whether to sell it. This may not be ideal for Harry and Sally’s plans for the farm. Even if Harry and Sally are certain their children will not sell the farm, their children’s lives pose potential unforeseen risks to the farm.
IN CHILDREN’S HANDS
Children go bankrupt. Children get divorced. They may even need nursing home care before their parents. If something happens in their children’s lives, Harry and Sally’s plan to keep the farm in the family, and out of harm’s way, may be at risk.
A third reason for Harry and Sally to not give the farm to the children is taxes. By giving their farm to their children, Harry and Sally will be setting up their children to potentially pay more in capital gains tax than necessary. If their children must sell part or all of the farm, the children’s capital gains tax will be determined by the difference in the sale price and the price Harry and Sally paid for the farm.
If, however, Harry and Sally own the farm when they die, capital gains tax will be determined by the difference in the sale price and the value of the farm on the day of the surviving parent’s death. This usually results in less capital gain. Giving their farm away may protect it from the nursing home, but now Harry and Sally’s children may lose money to Uncle Sam.
Is there a better way to preserve the farm? To help Harry and Sally protect the farm and maintain control, they could transfer their ownership interest to an irrevocable trust. The transfer to a trust has implications for any future medical assistance (e.g., the five-year look back period). The gift to the trust, however, rather than a gift to their children, will allow Harry and Sally to maintain control of the farm, if desired. The trust is also not subject to a claim by the state for benefits paid on either Harry or Sally’s behalf, thus avoiding any issues with the state after their death. A trust can also allow the farm to be part of the surviving spouse’s estate, which typically helps children pay less in capital gains in the future.
So, by contacting an elder law attorney and planning early, Harry and Sally can explore options to maintain control of the farm, possibly continue to receive income, help ensure the farm will not be subject to an unwanted claim by the state after death and provide more favorable capital gains treatment for their children.
Planning will help Harry and Sally keep an eye on their farm and avoid being mashed by long-term care costs in the future.
© 2019 The Badger Common Tater Antigo, WI. Reprinted with permission
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