Many families have a farm that has been in the family for generations. Title to these farms is often transferred as an inheritance to one or more of the children in the next generation.
In the past, the biggest threat to keeping the farm in the family was the inheritance tax. Thankfully, the Federal Estate Tax system now has an exemption from tax of over $5.4 million and the Pennsylvania Inheritance Tax system has a family farm exemption from tax, provided certain conditions are met.
Today, the biggest threat to family farms is the cost of long term care. In-home care as well as nursing home care can cost over $9000 per month. That cost can consume the savings of the average family very quickly. Many families turn to the Medicaid program to help pay for their loved one’s care.
However, Medicaid has many complex financial qualification rules. In addition, the Medicaid Estate Recovery Program seeks to recover the amount of Medicaid paid to the person who received the benefit. The Medicaid Estate Recovery Program allows the government to place a lien on any real estate owned by the Medicaid recipient after death. Given the high cost of long term care, the lien could be over $100,000 and dramatically affect the ability of a family to pass on a family farm to the next generation. In some cases, the farm may have to be sold to pay off the lien.
To protect the farm, families need to change ownership of the farm from the current aging generation to the younger generation well before a long term care crisis occurs. In the past, transferring the farm directly to children was the preferred plan. Today, the risk of financial distress, divorce, death and dysfunction with children (and in-laws), has pushed parents to seek another option to an outright transfer of ownership.
The irrevocable asset protection trust has become the preferred method of protecting the family farm. Title to the farm can be transferred to an irrevocable trust and sheltered from the Medicaid Estate Recovery Program. An irrevocable trust also provides protection from the risks associated with children’s lives, such as divorce. The children will take title to the farm only at the death of the parents. These trusts also permit the parents to live at the farm for the rest of their lives, allow for the sale of the property to a child or other person, and provide advantageous capital gains treatment of the farm.
Of course, asset protection trusts should be created well before a long term care crisis. There is a five (5) year look back for transfers of real estate under the Medicaid rules. However, if the transfer to the trust is done five (5) years prior to applying for Medicaid, that transfer will not affect eligibility for Medicaid benefits. Skilled elder law attorneys can help you plan in advance with asset protection trusts and save the family farm for future generations.