Medicaid Planning with the Family Farm or Cottage
In the not too distant past, the largest obstacle to passing property to the next generation was estate and inheritance taxes, now those taxes are nearly non-existent. Last year, effective January 1, 2013, the Indiana inheritance tax expired, and for tax year 2014, a decedent can have up to $5.34 million before the estate tax is imposed. So, unless a married couple has in excess of $10.68 million, it is unlikely a penny of estate or inheritance tax will be paid.
So, what is the largest obstacle to passing property to the next generation now? It’s the cost of long term care, i.e. the nursing home. Nursing home residents have to pay in excess of $70,000 a year to be in a place no one really wants to be. For many families, the nursing home becomes the biggest obstacle to passing on the family farm to the next generation.
Generally, when we think about planning for the cost of long term care, if long term care insurance is not available, Medicare, along with supplemental insurance, can pay for the first 100 days, so long as there is a qualifying stay at a hospital and you are discharged to the skilled care section of a nursing home. If neither of these options are available or exhausted, then many people look to Medicaid to pay for the cost of long term care.
In many cases, the best time to start planning for the cost of long term care is when Mom or Dad enters the nursing home. This is provided they previously have made an appropriate Durable General Power of Attorney. However, farming families, or families with other sentimental property, such as a lake house, have a unique planning option available to them.
Changes in the administration of the gift and estate taxes, coupled with the expiration of Indiana’s inheritance tax, have made advanced planning with the family farm or family cottage more advantageous than in the past. Here, planning is done through gifting and the use of a Limited Liability Company (LLC).
A simple example of this is as follows:
Mom and Dad deed the land to an LLC owned by their children, and retain a life estate. There is no Medicaid estate recovery against life estates. When the property is deeded to the LLC, this will start a five-year period where Mom and Dad would not be eligible for Medicaid if they had to go to a nursing home. However, the land can be deeded back to Mom and Dad if necessary to eliminate the transfer penalty.
The use of the LLC protects Mom and Dad’s interest in the land in case something happens to any of their children. This also gives them a convenient operating entity after Mom and Dad’s death to continue the farm operation or maintain a lake cottage. You can read about a few of the benefits of owning real estate in an LLC here.
At the end of the five-year period, the income from the property continues to pay for their care, but the underlying asset is protected for the next generation.
Therefore, with proper planning, families can greatly increase the likelihood the family farm or cottage will transition smoothly to the next generation where it can benefit and be enjoyed for years to come.
Christopher L. Nusbaum