Hundreds of thousands of American farmers across the country face a disconcerting reality: one bad illness or one liability lawsuit could damage the business that you’ve spent decades building. Getting sick is an unpleasant inevitability, especially as you age. Lost wages and expenses caused by nursing home care can drain assets and ultimately force you to sell the farm or divest most of it, if you haven’t planned ahead. Likewise, a family divorce, injured employee or rapidly shifting marketplace can all compel compromises. So how can you protect what you’ve built and ensure the success of the next generation?
This article summarizes powerful tools and ideas to shield your farm, make generational transfer simpler and develop a smart estate planning strategy.
Finding the right people to help you
Independent farmers who build enduring businesses know the value of great people, whether they’re hiring farmhands, negotiating deals or repairing critical equipment needed for a harvest. To make the farm function without your constant watchfulness, you need people who share your values — hard work, honesty, dedication — to make your vision come to life.
Apply a similar diligence when choosing professionals to identify your farm’s risks and meet them. Look for an attorney who’s skilled in tax law, estate planning and elder care to develop your approach.
Costs of residential care
Spending time in a nursing home can be ruinously expensive. Consider that the cost for a relatively minor medical problem — rehabilitation after a fall — averages $238 a day in the United States. That’s over $86,000 a year, and many patients face far more serious conditions and bigger bills.
Why are such costs so high? Skilled Nursing Homes (SNFs) must maintain large properties, carry lots of insurance and provide round-the-clock nursing care for patients. Caregivers also need to dispense complex medication orders and provide physical therapy and in-depth mental health care.
Unfortunately, costs are heading in the wrong direction. You have a 40% chance of spending at least some time in a SNF. If you’re married, the odds that you or your spouse will need residential care rise to 70%. The U.S. population is aging, thanks to the greying of the Baby Boomers, and the number of people expected to enter long-term care will increase substantially over the next decade. Economists estimate that this financial time bomb will double long-term care costs by 2030.
Strategies for covering costs and protecting your farm and legacy
To manage costs associated with a stay in a SNF, as well as other unanticipated medical expenses, you need to be strategic. Such costs frequently run far beyond what insurance can cover, leaving patients with exorbitant out-of-pocket expenses. Medicare offers some payment options for patients who’ve reached the age requirements and opted for Part B coverage, but Medicare won’t come close to covering all the expenses of a prolonged stay. Some people opt for solutions like Medicare Supplement Insurance (“Medigap”) to handle excess costs, but even this coverage might not be sufficient or effective.
Medicaid, meanwhile, the state-federal program for providing health insurance to low-income Americans, can also be used as a supplement. Unfortunately, Medicaid is means-tested, which means that the program applies strict scrutiny to your financial situation and imposes caps on your net worth and income. Above a certain (very low) level, you will be required to meet an annual share-of-cost payment, sometimes in the thousands of dollars, before Medicaid dispenses a single dollar of coverage.
Once your Medicare plan and the supplement have been exhausted — when you’ve spent every dime you have, and your children are digging into their savings to support your care — the SNF could bring action to seize your assets to cover the care costs you’ve incurred.
Non-health related threats
Injury and illness aren’t the only threats to the financial stability of your family farm. Each year, 15 million lawsuits are filed against property owners for negligence and property damage, leading to $251 billion in costs. Something as unexpected as a collapsing silo could easily land you in court, fighting for your family’s financial life against a seven-figure lawsuit. To protect your farm from lawsuits and other predatory behavior, you need to develop a comprehensive asset protection plan to protect you from creditors and predators.
Let’s explore some tactical planning possibilities.
Instruments to shield the farm
• Establish multiple LLCs. A limited liability corporation acts like both a corporation and a partnership to shield farm assets from creditors. By strategically setting up multiple LLCs, you protect the farm from external challenges (not related directly to the farm — like a divorce or a lawsuit you incur after an accident on vacation in another state) as well as internal creditors (directly related to the farm, such as a farm hand throwing out his back working on a poorly maintained machine or a customer getting sick after eating vegetables grown on the farm.)
• Medicaid Asset Protection Trusts. These instruments allow you to transfer ownership, on paper, to a trusted friend or family member, such as your eldest child, while retaining all of the income from the property. This property then becomes invisible to Medicaid means testing.
• Master Leases. These technically sophisticated arrangements between your holding company LLC and an operating company LLC effectively prevent creditors from attaching farm assets.
The vast majority of farms fail to transition to the second generation. Even bigger majorities — up to 96% — fail during the third and fourth generations. Nearly two thirds of all farmers, per Farm Bureau statistics, have no written estate plan, and nearly nine out of every 10 farmers have no transfer plan.
To ensure the legacy you’ve built, cover elements such as:
• “SWOT” assessment. What are the farm’s Strengths, Weaknesses, Opportunities and Threats? Identify these elements, and determine whether to hold onto the farm or sell or transition it to the next generation (e.g. hand it off to a child trained in farm management.)
• Changes to the farm’s culture and vision. If your son takes over the farm, for instance, he may have different ideas and a different vision for how to develop the business. What new skills or tools will he and the farm need? What will be obsolete or less needed? Plan for this generational transition.
• Possible ownership arrangements. Newer farms tend to have models in which those involved in the day-to-day work also own the farm’s assets. As the farm business matures, however, other models tend to emerge, such as scenarios in which multiple relatives (some working actively on the farm, some not) own and share the assets as well as models in which trusts and LLCs own the farm.
• Family challenges. What if your daughter wants to run the farm actively, but your two sons working in New York don’t want anything to do with the business? What if no children want to run it, or two or three all want the helm? Your succession plan needs to address what the transition will mean for your spouse or partner and your children.
Comprehensive farm protection
Diverse threats to your farm can come from any direction. Accidents, sudden sickness, surprise legal actions, family issues and questions about generational transfer can all pose issues. To prepare adequately, you need a skilled adviser with a breadth of knowledge and a track record for helping farmers like you.
Our law firm is uniquely suited to be of assistance. We’re quite possibly the only firm in the Ohio, Indiana and Kentucky area capable of addressing the twin challenges of farm estate planning and elder care management. To begin the essential process of protecting your farm, call
Ted Gudorf, J.D., LL.M. is the founder and Managing Attorney of Gudorf Law Group, LLC, which was established in 1992. He can be reached at Gudorf Law Group, LLC, 937-898-5583 or www.DaytonEstatePlanningLaw.com.