Have you planned for up to $139,000 a year for nursing home care costs?
Chris Torres, Editor, American Agriculturist
One thing that may be overlooked in your farm transition planning is the money needed for retirement and elder care.
In Pennsylvania, for example, a private nursing home can cost anywhere from $89,000 to $139,000 a year, with an average stay of three years. That’s nearly $400,000 in three years.
“Bottom line, when you’re doing planning, nursing home costs are becoming a great concern, and it’s important to look at that as one aspect of an overall transition plan so you don’t have to get to a point where farm assets are being liquidated in order to cover nursing home care,” Jennifer Wetzel said to a group of attendees at the recent “Future-proofing Our Farms” conference in Harrisburg, Pa.
Wetzel, an attorney who specializes in ag estate planning with the Hazen Law Group, said 50% of nursing home costs can be covered by Medicaid. But this is a needs-based program with asset and income eligibility requirements that vary by state.
In Pennsylvania, for example, to qualify for Medicaid, if you’re a single person, you would need to spend down your assets to $2,400 — or $8,000 for lower-income people. This does not include your car, house or personal possessions.
If you have a spouse who is not going into a nursing home and you apply for Medicaid, the spouse can keep some of the countable assets, also known as the community spouse resource allowance. In this situation, Wetzel said non-excluded assets are divided by two to come up with an allowance. The current minimum is $30,828, and the current maximum is $154,410.
"So, the planning is to determine whether to preserve and try to protect some of your assets so that you can apply for Medicaid, or whether to pay your own way or gain long-term care insurance, which would cover the nursing home costs,” she said.
But the calculation must also account for the five-year look-back on gift transfers, which is subject to a $379-a-day penalty. "So, if you were to gift, say, $100,000, you would take that, divide it by $379, and that's the number of days you would otherwise be ineligible to receive Medicaid when you otherwise needed it,” Wetzel said.
It’s one reason Mike Hosterman, ag business consultant with Horizon Farm Credit, said farmers shouldn’t wait to develop a transition plan.
“One of my pet peeves is when I
get a call from a producer saying, ‘I need a transition plan,’ and it's
this time of year [fall] and we ask them, what's their timeline? And
they say, ‘I need it by the end of the year.’ It happens on a regular
basis,” Hosterman said. “Find a professional. It takes a team and people
who are skilled in transitioning, but also have knowledge of farm
transitions. There's a lot of value on those balance sheets, and it's
not in cash. And that makes it hard with these transitions.”
Find the ‘leader’
The most successful farm transitions, Hosterman said, are led by someone who can keep the focus on the farm’s transition to the next generation.
"When I think about a successful transition plan, there's someone leading it along,” he said. “And that's not just from the senior generation or the next generation. That's from those of us in industry that also help them.”
Hosterman said farm families should expect 18 to 24 months to develop a farm transition plan. Once it’s developed, it then needs to be implemented, evaluated and adjusted. But it’s at the implementation stage where he sees most transition plans fail.
"One of the biggest failures I see out there is that's when this process stops,” Hosterman said. “We develop a plan, we think we implement it, but we don't communicate about where we are. We don't step back and evaluate our plans on a regular basis.”
‘3 elements’ of a transition
Successful transitions, Hosterman said, address three basic elements: the transfer of ownership, the transfer of management and how income will be divided.
Not everything has to be planned or set in stone at the same time. For example, a farm’s management is something that can take years to hammer out.
“So, usually we start working on it sooner,” Hosterman said. “Why? As our next generation gets out of school — say a 22-year-old graduating from college — and they want to get back to the business or go work away for a couple of years, they have a lot to learn yet. So, we have to transfer that management, that decision-making over time.”
As the farm transitions to the next generation, this is when income can start being divided. But if the farm supports multiple families, a growth plan should also be considered.
“Now that growth doesn't always come from, hey, we have to double that herd size,” Hosterman said. “It could come from more efficiency, more milk per cow. We're controlling expenses differently. The key is that bottom line, the available funds, the net income from the business, has to be growing to support multiple families.”
Besides having someone lead the transition, Hosterman said the most successful farm transitions he sees are farms that are profitable and cash-flowing; have equity greater than 65%; and have clear goals and are attractive to the next generation.
"Are the earnings there to
support multiple families?” he said. “If that senior generation is not
putting money away, and they're relying on a sale of assets or income
from the rest of their life from the business, that business has to
ready to support multiple families. And that is one of the biggest
weaknesses I see out there, is families don't always know what they
need.”
Legal ramifications
Wetzel said five areas, from a legal perspective, should be addressed in any transition plan:
- minimization of taxes
- liability protection
- elder law considerations
- marital considerations
- estate planning
documentation
As it stands now, the federal estate tax exclusion amount is $13.61 million per person, or $27.22 million for a couple that elects portability. The gift tax exclusion is $18,000 per person and is tied to inflation, with changes in $1,000 increments.
This could change at the end of next year as current law expires, and without changes the estate tax will revert to $7 million per person with a top tax rate of 40%.
Inheritance taxes can also be levied by states. In Pennsylvania, for example, the inheritance tax ranges from 0% to 15%. However, farm-related exemptions that came into law in 2012 now mean that, with appropriate planning, a producer can basically transfer their farming operation without having to pay — or pay very little — inheritance tax.
For entity planning, Wetzel said the limited liability company, or LLC, is what most farmers choose, as opposed to partnerships or corporations. An LLC allows for limited liability for each member.
"You essentially build a wall between your personal assets and your professional assets, which helps keep the business continuing to the next generation," she said.
For more information on estate planning, visit hazenlawgroup.com.
