Fears of Estate Tax Exemption Boogeyman Subside; Other Monsters Still Lurk

Last year, I wrote a column about the repeal of the federal estate tax exemption and how certain estate and succession planning steps needed to be considered. Since the election, however, many experts say there’s no chance the estate tax exemption will be cut. 

As a refresher, an individual can currently shield $13,610,000 from the federal estate tax, or $27,220,000 for a married couple. Pre-election fears were that the current law would sunset January 1, 2026, reverting the amount that could be shielded to $6,800,000 per person with “adjustments for inflation,” or around $7,500,000 million per person.  

Now, the most likely scenario is that the law will be renewed for many years and the exemption will continue to climb as it has for more than a decade. The Repeal Boogeyman has melted away like the Wicked Witch of the West being doused with water in the Wizard of Oz.

Now that the Repeal Boogeyman has been vanquished, let’s take a look at some of the other factors and situations that can create major financial harm to farms, even to the point of bankruptcy. I recommend readers spend the winter months considering the potential impact on their farm operations.

Long-Term Healthcare

This is an expense 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.  

If a person applies for Medicaid, they must spend down their cash assets in order to qualify, which means their estate is cash poor. If Medicaid pays for a long-term healthcare facility, after the person dies, it can file a lien against their estate to be paid back for those expenses. In that case, the estate’s assets — which almost always include land — must be sold. 

I am amazed at the number of people who have no knowledge that Medicaid can, and will, file a lien 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 the land itself.

If the person in question owned less than 50% of the LLC — making them a minority owner — the marketability of their shares is practically null. In my 19 years of practice, I have never seen a non-family member purchase interest in a small, family-held company. Also, many LLC operating agreements have strict transfer rules, limiting who can be a member. Depending on the state, Medicaid would have to sue the LLC to force it to 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. 

In most states, an LLC combined with a revocable trust provides a solid one-two punch against Medicaid liens. Studies show 70% of people will end up in some form of assisted living facility, but only 3-4% of people have long-term care insurance. The average cost for a nursing home in the United States is $10,000 per month. Obviously, there is nothing warm and fuzzy about these statistics. The fact that most farmers are land rich and cash poor(er) means if long-term care is required, there’s a very good chance the family will be forced to sell some or all of the farm to cover expenses. 

Gifting is another way to help protect the farm from Medicaid recovery. In 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. For the vast majority of farm families, long-term care costs are more of a threat than the federal estate tax. Unless you are independently wealthy and can simply self-pay for long-term care, discussions about the use of LLCs and/or gifting need to take place. 

Lawsuits and Penalties

Another area that can sink a farm faster than the federal estate tax is lawsuits and environmental penalties. Volumes could be written about all the things that can go wrong on a farm, leading to ever-increasing jury awards against the business.

If 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 plus the jury verdict to be in the tens of millions. A farmer simply cannot have enough insurance to protect against lawsuits arising from a serious injury or death.  

Another example is if a large fertilizer spill enters a waterway and causes a fish kill in a lake. Not only will there be a fine and massive cleanup cost, but 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. 

Legal Entities

Bad things are going to happen if you farm long enough; it’s just a matter of how bad, and when. Is your farm is structured properly to withstand bad legal weather blowing in? Do you utilize legal entities? If not, you should. I’ve seen farm operations survive lawsuits only 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, if you don’t have a company minute book, hold regular meetings, pass resolutions, and so forth, the door can be opened 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 with no minute book for all. Sadly, in these cases, having a legal entity gives a false sense of security. 

Wills and Trusts

With the increased value of farm estates, heirs 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 people don’t expect anyone to contest their will or trust, but it only takes one disgruntled heir to bog an estate down in expensive litigation for years. 

Some states allow for “pre-mortem validation,” where a copy of a person’s will and/or trust is provided to heirs, who have a certain time limit — while the person is still alive — to contest it. If they do not, then they cannot contest after the person’s death. 

If you have an estate plan and have shared it with your heirs anyway, it only makes sense to try and eliminate any contesting while you are alive. If your state does not allow for pre-mortem validation, make sure your will and/or trust has a no-contest clause stating if an heir brings an action to contest the will and loses, they receive nothing.

Unless the federal estate tax is eventually repealed, farmers will need to keep it on their 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 the farm operation.

Now that we are fairly sure the federal estate tax exemption will not sunset, use the slower winter months to focus on the situations and events that can be detrimental to the longevity of your farm operation and discuss 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.