Asset Protection and Long Term Care or "How Do We Save the Farm From the Nursing Home"
Strikingly, in the last 30 years the average age of farmers has increased from 50.5 years to 58.3 years. About 20% of seniors over the age of 65 will require long term care for more than 5 years.
Projected Long-Term Care Needs for 65-Year-Olds in 2005
|Men, age 65+||Women, age 65+||All, age 65+|
|Percentage who will need care||58%||79%||69%|
|Average number of years||2.2||3.7||3|
|Percentage needing no care||42%||21%||31%|
|Percentage needing 1 year or less||19%||16%||17%|
|Percentage needing 1-2 years||10%||13%||12%|
|Percentage needing 2-5 years||17%||22%||20%|
|Percentage needing 5+ years||11%||28%||20%|
|Source: Kemper, Komisar, and Alecxih(2005)|
Because the cost of staying in a nursing home is around $6,000 per month (or $72,000 per year), most people requiring long term care will be unable to afford it and are forced to turn to Medicaid to pay for long term care.
To be eligible for Medicaid the applicant may have no more than $2,000 in countable resources. Almost everything an applicant owns is a countable resource. A farmer needing long term care may face the need to sell the farm or the entire farm operation prior to receiving assistance from Medicaid.
Farm families faced with the need for long term care face special challenges. They may face the loss of the entire farming operation either before or after receiving Medicaid assistance. The decisions and choices a farmer in his or her 50’s and 60’s makes will impact how long term care may impact what happens to the family farm if long-term nursing care is needed.
WHAT CAN I DO TO PROTECT THE FARM FROM THE NURSING HOME?
Although farm families often have hundreds of thousands or even millions of dollars in wealth in land, equipment, stored grain, and other assets, they often do not have the cash to pay for long term care, especially if it lasts for more than 5 years.
LIFE TIME GIVING
Simply giving the farm to your children is an effective way of protecting the assets from Medicaid. Provided the gift was made more than 5 years prior to applying for Medicaid, the property is not a “countable resource,” and there is no penalty for having given the asset away. If the gift is made within 5 years of applying for Medicaid, then the applicant is disqualified from Medicaid for the number of months equal to the value of the gift, divided by the “transferred resource factor” which can be thought of as the average cost of nursing care. In other words, if a gift of $100,000 is made, the applicant would be disqualified from Medicaid about 17 months.
While making a lifetime gift of the family farm more than 5 years before applying for Medicaid may be effective for protecting the farm from Medicaid, the gift may create the risk of losing the farm in other ways. A farm given to your child or children is subject to all of the potential liabilities of that child. The farm could be lost to divorce or bankruptcy. Any “understandings” between the farmer and his child regarding the farm will not be honored by a bankruptcy court or divorcing spouse.
Aside from creditors and predators there is another downside to lifetime gifting. Assets that are left through inheritance receive a “stepped up” tax basis. If the farm was bought for $500,000 and is now worth $1,000,000, the child who receives it as a lifetime gift would owe a capital gains tax on the difference if he or she decided to sell the farm. If the property is inherited, it gets a new tax basis equal to the value of the property at death, meaning there would be little or no capital gains tax if the property were sold soon after death.
The first thing to remember about using trusts for Medicaid planning is that Revocable Trusts or “Living Trusts” provide no Medicaid protection whatsoever. In fact, any assets held by the revocable trust will have to be transferred back to the applicant.
An irrevocable trust that provides effective protection against Medicaid will not permit the trustee, under any circumstances, to distribute any of the principal assets held by the trust to the applicant or his or her spouse. This means that if the family farm is placed into the trust, it could not be sold and the proceeds distributed to the applicant or his or her spouse. The farm can be sold and the proceeds could be distributed to the farmer’s children, but under no circumstances could they be delivered to the applicant for Medicaid.
The income from the farm can be retained by the applicant, but that income would be a countable resource. Additionally, the farmer can reserve the right to change trustees and even the beneficiaries upon the farmer’s death. One further advantage is that the trust can be structured in such a way that upon the farmer’s death, the property gets a “step-up” in its tax basis so that the farmer’s children can sell the property with minimal capital gains tax.
PREPARE FOR THE FUTURE
With some advanced planning, preserving your family farm as a legacy to your children is possible, even when faced with the need for long term nursing care. By planning ahead, you can save the farm from the nursing home.