The primary goal of most individuals seeking advice regarding long-term care is to preserve assets for their children and to avoid having to sell everything to pay for the nursing home. This can be a challenging goal to achieve when much of a family’s assets consist of farmland.
It is important to note that assets transferred into most trusts or other legal entities are not excluded assets when applying for medical assistance. Therefore, your estate plan may not always be the same or mirror your long-term care plan.
Minnesota has a 5-year look back period for gifting. This means you cannot give anything away for less than the fair market value within the 5 years prior to receiving care.
Gifting farmland, equipment, grain, or livestock can be advantageous if done early. However, there are drawbacks to consider when gifting. They include:
Loss of control over the asset
Loss of income from the asset
Loss of step up in basis
Gift tax and filing a gift tax return
Loss of constitutional homestead protection from creditors
Loss of homestead classification for property tax purposes
Often it is too late to gift or gifting does not make sense. In those cases, it important to understand the alternative options and strategies to protecting the farm for future generations.
Other common approaches with farmland are to gift the property and retain a life estate or to sell the property on a contract for deed. Whereas, these are great planning tools for the next generation, they do not completely protect the asset.
Life estates created after August 1, 2003, are considered assets for medical assistance purposes. Life estate interests are determined by a mortality table and are based on the life expectancy of the individual retaining the life estate. Life estates are often subject to estate recovery and Medical Assistance liens after the death of the Medical Assistance recipient and their spouse. Although an available asset and subject to estate recovery, life estates can still be a useful tool for farmers, as they provide a step up in basis at death, reduce the equity the farmer has in the property and provide a succession plan.
Contract for deeds are also subject to Medical Assistance. If the Medical Assistance applicant is the seller, the value of the contract for feed is counted as an available asset unless the applicant is making “reasonable efforts to sell” the contract. The interest is also considered income to seller. However, the land subject to the contract for deed is not counted as available. If the Medical Assistance applicant is the buyer, the value of the property less any encumbrances is counted as an available asset.
Further, transferring assets to a family partnership or limited liability company, as means of succession planning does not protect those assets from Medical Assistance. If the Medical Assistance applicant retains any interest in the business entity, their percentage of ownership will be counted toward their asset limit. If they do not retain ownership and assets were transferred to the business entity within the 5-year lookback period, a penalty period of ineligibility will be applied.
Since many of the usual succession planning tools do not protect farmers from Medical Assistance, below are some alternative methods to protect the farm when applying for Medical Assistance.
Agricultural Homestead Exclusion
The Medical Assistance homestead exclusion is $585,000.00 in 2019. This exclusion applies to the home and all contiguous land and buildings on that land owned by the Medical Assistance applicant or their spouse. If the home meets this definition the homestead is an excluded asset and not counted toward the asset limit of the Medical Assistance applicant or their spouse.
Two Year Caregiver Rule
If a child lived in the home for at least two consecutive years prior to the Medical Assistance applicant entering a skilled nursing facility, the homestead can be transferred to the child without penalty. Provided, however, it can be shown the child providing care enabled the applicant to remain in the home, thus delaying care.
Self-Support Excluded Assets
Assets of an active trade or business that are necessary to earn income can qualify as an exclusion to the asset limit. Therefore, assets needed to operate a farm business may be able to be excluded. However, this does not protect these assets from an estate recovery claim. Farmers should not rely solely on this exclusion, as not all farms see an income every year.
Updated Estate Plan
It is generally advised that the spouse living in community execute estate plan documents disinheriting the ill the spouse. The community spouse should also retitle any joint accounts or joint assets into their name alone. This prevents issues from occurring in the event the community spouse predeceases the spouse receiving skilled nursing care.
When it comes to farm succession planning, it is important to understand how assets will be treated upon death. Excluded or unavailable assets may still be subject to estate recovery. The state may recover the value of the Medical Assistance benefits received by the decedent or their spouse’s estate. This can be done by making a Medical Assistance claim against the estate or putting a lien on real property.
Many farmers may never need to apply for Medical Assistance. There are many alternative options to provide enough income to pay for the cost of care. These alternatives include:
Re-negotiating leases to reflect a fair market rental rate to obtain a higher income to pay for care;
Selling or renting machinery to farming successors;
Selling real estate to successors for its fair market value;
Reducing non-productive assets or real estate by selling or placing land in a governmental program such as the Conservation Reserve Program;
Obtaining long-term care insurance; and
VA benefit options.
Creating the right succession plan that is also Medical Assistance proof can be challenging. Our attorneys are here to help. We can help you create a plan that achieves your goals and is right for your family. Contact our office or book an appointment online to schedule an initial consult.