Senior family members often continue owning farm real estate, limited liability company interests and other assets essential to the farm, along with their non-farm financial investments and other assets. They may have decided to keep the farm assets as a source of income and financial security, and to enjoy meaningful continued involvement in the farm business.
They may have been advised to hold the farm assets until death to gain the stepped-up basis to fair market value. They likely plan to transfer the farm assets to their farm successors, with non-farm assets providing a reasonable inheritance to the children who left the farm. However, they also want to prevent their assets, especially farm assets, from being used to pay medical and nursing home, assisted living, and even professional at-home long-term care (LTC) expenses.
Aging or the diagnosis of a chronic condition heightens concern about the potential adverse financial impacts of necessary future nursing home, professional assisted living or at-home care. The expenses of professional LTC are very high and increasing. Most farm families believe they will be able to provide the care necessary to keep their parents at home and on the farm. But too often, the effects of aging or a chronic condition mandate long-term care beyond the family’s ability and resources.
When LTC is required, those expenses must be self-paid through LTC insurance or paid through Medicaid, which will require divestment of assets and advance planning. Assets can be divested through lifetime gifts. But the donees will receive a carryover basis (i.e., the donor’s basis) in the gifted farm assets. Any retained life estate is subject to draconian “estate recovery rules” requiring repayment of expenses paid through Medicaid.
The goal of the trust is to disassociate you from the assets you and/or your spouse contribute to the trust so they will not be considered in determining your eligibility for Medicaid. The trust must be an irrevocable trust and must meet all Medicaid and tax requirements. You and your spouse, as settlors, transfer designated farm assets and/or other assets to the trust, which are then considered the divested. The trust must have a trustee or trustees, which can be one or more of the children, other relatives, or independent parties. You must set up and transfer assets to the trust at least five years prior to applying for medical assistance (the “look back period”).
The trust can include your retained right to live in the house; to receive the net income of the trust, such as rental income from farm real estate; and/or to actively operate the farm real estate. In that event, the trust will be deemed a “grantor trust” so the net income is reported on your personal income tax return. The net income will remain available for LTC expenses, but the contributed assets are deemed divested and not available for LTC expenses or post-death estate recovery. Therefore, a Medicaid trust is often effective for farm assets, since you intended to transfer the farm assets to your successors at death, while retaining the right to the net income and/or occupancy of the residence.
Your Medicaid trust may include your right to change the beneficiaries (other than to yourself, your estate or your creditors) while still being considered an irrevocable for Medicaid qualification purposes. This limited power of appointment to change beneficiaries will result in a stepped-up basis in the trust assets as of the date of your death or, for a couple, on each death.
LTC planning for farmers and farm families is complex, but the risk of LTC expenses is avoided or at least managed with advance planning. A Medicaid trust is only one of the many options that should be considered in your planning.
Most importantly, I recommend that you have a complete medical checkup annually. Early identification and treatment of chronic medical conditions allows more effective treatment and the advance notice necessary for LTC planning.
Twohig is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.