Ag Law By John Schwarz Months ago, I wrote that we had reached the time again where the repeal of the federal estate tax exemption boogeyman (the “Repeal Boogeyman”) was being trotted out by many as grounds for taking certain estate and succession planning steps. For a quick refresher, currently a person can shield $13,610,000 from the federal estate tax. Together, a married couple can shield $27,220,000. In 2025, this amount will increase until the estate tax D-Day /Armageddon hits on Jan. 1, 2026. On that date, the current law will sunset and revert to $6,800,000 per person and be “adjusted for inflation.” With the high rate of inflation we have seen over the past few years, many believe, when adjusted for inflation, the new exclusion amount will be around $7.5 million per person. However, the results of the election last month have many giving a “zero” chance of the estate tax exemption dropping like a rock. Most likely, the law will get renewed for many years and we will see the exemption continue to go higher as we have seen for over a decade. Thus, the Repeal Boogeyman has melted away like the Wicked Witch of the West being doused with water in the Wizard of Oz. Unfortunately, there are many other factors or situations that can create major financial harm to farms, even to the point of bankruptcy. The purpose of this article is to identify some of these situations and hopefully readers can spend the winter months considering the potential effect on their farm operations, now that the Repeal Boogeyman appears to have been vanquished. Long-term health care is an area that can decimate a farm operation. Most farmers can point to a farm in their community that had to be sold to “pay the nursing home.” While the nursing home costs likely did exceed the individual’s finances, it’s a sure bet that Medicaid Estate Recovery had a part to play. Because, if a person goes into a long-term care facility, and enrolls in Medicaid, after the death of the individual, Medicaid can file a lien into the person’s estate to be paid back. And, the deceased person had to spend down their cash assets to qualify for Medicaid in the first place, meaning the estate is cash poor. So, assets of the estate must be sold, which almost always includes land. I am amazed at the number of people that have no knowledge that Medicaid can, and will, file a lien in on an estate causing land to be sold. In fact, in Indiana a mandatory report is made to Medicaid for every estate opened for an individual over the age of 55. Medicaid is a federal program that is administered by the states, so programs, as well as the aggressiveness of estate recovery, can vary. However, a little planning can go a long way. For example, if the land is held in an LLC, the deceased person’s estate owns shares in a company, not land. Suppose the deceased person owns less than 50 percent, thus being a minority owner. In 19 years, I have never seen a non-family member purchase interest in a small, family held company. Thus, the marketability of the deceased person’s shares is practically null. And, many LLC operating agreements have strict transfer rules, which greatly reduces who can be a member. Further, depending on the state, Medicaid would have to sue the LLC to make it do something, such as sell land, which would likely lead to years of litigation. In Indiana, it has been said that the Medicaid Estate Recovery has never sought to enforce a lien against an LLC. More so, an LLC in conjunction with a revocable trust, in most states, can give a solid one-two punch when it comes to Medicaid liens. Studies show that 70 percent of people will end up in some form of assisted living facility. Sadly, studies further show only 3-4 percent of people have long term care insurance. And, the average monthly nursing home cost in the United States is right at $10,000. Obviously, there is nothing warm and fuzzy about these statistics. Compounding the problem is the fact that most farmers are land rich and cash poor(er). All this creates a very good chance that a family is forced to sell some or all of a farm just for long-term care expenses. When it comes to protecting the farm from Medicaid Recovery, discussions should be had regarding gifting. For 2024, a person can gift $13,610,000 in cash, cats, cows, etc., with no tax to the person making the gift and no tax to the person receiving the gift. As long as the gift is made at least five years prior to applying for Medicaid, the gift will not render a person ineligible for Medicaid. It is easy to see that for the vast majority of farm families, long term care costs are more of a threat than the federal estate tax. Thus, if a person is not independently wealthy where they can simply self-pay for long term care, discussions about the use of LLCs and/or gifting need to take place. Another area that, in my opinion, can sink a farm faster than the federal estate tax is lawsuits and environmental penalties. Jury verdicts continue to go higher and higher. Meaning, when your semi-truck causes an accident, you could be staring down a multimillion-dollar lawsuit, and it is not out of the question for the amount of damages claimed, and the jury verdict, to be double digit millions. It has gotten to the point that a farmer simply cannot have enough insurance to protect against lawsuits arising from a serious injury or death. Or, think about if you were, for example, to have a large fertilizer spill that enters a waterway and causes a fish kill in a lake. Not only will there be a fine and massive cleanup cost, but you can bet if you ruin the fishing or recreational activities on a lake surrounded by residents, you’ll be hearing from those folks as well via lawsuits. Volumes could be written regarding all the bad things that can befall a farm operation, giving rise to a lawsuit and a large award of damages against the farm operation. Bad things are going to happen if you farm long enough. The questions are merely how bad, and when. Discussions should be had as to whether your farm is structured properly to withstand bad legal weather blowing in. Do you utilize legal entities? If not, you should be. I’ve seen farm operations only survive lawsuits because of the use of multiple legal entities. If you are using legal entities, are you doing what you need to do to keep a plaintiff’s lawyer from “piercing the veil” of your companies to get to you personally? In most states, not having a company minute book, having regular meetings, passing resolutions, and so forth, can open the door for you to be sued personally along with your company. Routinely, people show up at my office with a minute book that has not been updated for years, sometimes decades, or no minute book for all. Sadly, in these cases having a legal entity gives a false sense of security. Lastly, with the increased value of farm estates, people are more likely to contest a will or a trust if they feel slighted by what they receive. Few things are more disheartening than having put time and expense into generating a farm estate plan, only to see it undone by legal action contesting the plan. Most times a person does not expect an heir to contest their will or trust, but it only takes one disgruntled heir to bog your estate down for years in expensive litigation. Some states allow for “pre-mortem validation,” where a person can create a will and/or trust, provide a copy to the heirs, and the heirs have a certain time duration, while the person is alive, to contest the will or trust. If they do not, then they cannot contest after the person’s death. Especially if you have an estate plan and you have shared it with your heirs, it makes sense to try to head off a will or trust contest while you are alive. If your state does not allow for pre-mortem validation, then make sure your will and/or trust has a no-contest clause where if the person contesting the will or trust receives nothing if they bring an action and lose. In closing, unless the federal estate tax is eventually repealed, it is something that should be on a person’s radar, especially if the farm asset values are near or above the exemption level. But, for the vast number of farms in this country, there are greater evils lurking that can sink a farm operation. Now that we have a fairly certain idea that the federal estate tax exemption will not sunset, focus should be turned to other situations and events that can be detrimental to the longevity of your farm operation. Use the slower winter months to discuss some of these issues with family. These articles are for general information purposes only and should not be construed as specific legal advice or to create an attorney-client relationship. Laws vary among states and information contained in this article may not be applicable to your state. If you have a legal issue, you should contact an attorney. John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 18 years and is passionate in helping farm families with legal matters. Natalie Boocher, an elder law attorney assisting clients with a wide range of long-term care planning and asset preservation, contributed to this article. They can be reached at 1-844-FARMLAW and www.thefarmlawyer.com. Go to www.farmlegacy.blogspot.com for past articles. |