The previous section outlined why trusts, generally, can be beneficial to the disposition of business assets. Above, we’ve reiterated what goals various trusts can accomplish. Not all trusts will achieve all of these goals. But, if any of these goals align with your own,  you need to know more about trusts to know which will best suit your needs.

We discuss three of the most common types of trusts below. For each type of trust, we show which goals it can accomplish, its drawbacks, and how it functions as part of a business succession plan. The three types of trusts we will discuss are (1) revocable living trusts, (2) irrevocable living trusts, and (3) testamentary trusts.

You’ll notice that the trusts listed above share some words in common. So, before we start, let’s define some shared trust language. First, notice that trusts can be “living” or “testamentary.” These words refer to when in the creator’s life the trust is activated, or when it starts functioning as a trust. Living trusts become effective at the time of creation, during the lifetime of the person creating the trust. On the other hand, testamentary trusts are only activated after the creator dies.

Secondly, trusts can also be “revocable” or “irrevocable.” The difference between these types of trusts boils down to the power the trust’s creator has to alter or dissolve the trust. The creator of a revocable trust can change their mind about the property it holds or who the beneficiary is. On the other hand, the creator of an irrevocable trust has no such power. Once a person creates an irrevocable trust, it cannot be rescinded (though minor modifications could be possible with court involvement). All trusts eventually become irrevocable when the trust’s creator passes, so this difference is only relevant during the creator’s lifetime.

Testamentary Trusts

Testamentary trusts are established by their will after the creator’s death. A common use for these trusts is to hold family property if both parents were to die unexpectedly. Often, these trusts are set up to consistently disburse funds to minor children until they reach a particular age, when they will gain access to the funds or property in the trust. These trusts aren’t even funded until the death of the creator. For this reason, testamentary trusts don’t have benefits for the trust’s creator except for the peace of mind that their property would be safeguarded in the case of an unanticipated death.

For example, property entered into a testamentary trust must go through probate. The will creates these trusts, so the probate court process is necessary. Typically, testamentary trusts expire at a particular time or due to a specific event, for example, the beneficiaries reaching a certain age. However, these trusts are more economical –they do not cost as much to create or maintain.

Medicaid Eligibility

Medicaid is a jointly funded state and federal program to provide health care coverage for individuals with low income of all ages.  The federal government oversees the program, but each state administers its own program, so rules and available benefits can vary from state to state.

Medicaid is often confused with Medicare. Medicare is health insurance reserved for individuals aged 65 and older or younger with certain disabilities or conditions. This program is exclusively federal, so a person’s insurance coverage under this program will not vary from state to state.

Medicaid is sought after because it covers long-term care for those who are seriously ill or disabled and can no longer perform everyday activities on their own.

Many aging farmers are caught in a situation where, on paper, they have a fair amount of assets or total worth. In reality, their wealth is in their land, which they do not want to liquidate or sell to pay for health care costs at the end of their lives. To make the situation more complicated, farmers work very hard their entire lives but often haven’t earned enough to receive sustainable Social Security benefits upon retirement. Retirement planning isn’t standard on small owner-operator farms, either. This leaves many aging farmers struggling to pay for long-term care, whether in-home or at a nursing home.

For these reasons, many aging farmers rely on Medicaid for end-of-life care. There are many complications, though; the most pressing are the low-income and resource requirements determining eligibility. For this reason, without long-term care insurance or other financial resources, many farmers have limited options to pay for their long-term care. Farmers sometimes have to sell farmland to pay these costs. There is another option, though; trusts are a crucial tool to help protect farmland.

Eligibility

First, let’s look at what qualifies as “low income” for Medicaid purposes. Eligibility rules will vary by state. See the chart below for eligibility limits for institutional or nursing home Medicaid for a selection of states in the Northeast U.S.

Remember that there will be limits on what one’s monthly income can be and the total assets or resources possessed by the person who wants to apply for Medicaid.  Wages, Social Security Income, disability, or veteran benefits will be added to calculate monthly income.

Exemptions to Asset Calculations

The asset limits are for countable assets, which include bank accounts, retirement accounts, stocks, bonds, cash and anything that can be easily turned into cash.

Some assets don’t count toward these asset limits. What a relief! If the Medicaid recipient continues to live in their home or plans to return to their home, then the home will not be counted in the asset tally. However, that home must not exceed equity limits. Home equity is the home’s fair market value minus any outstanding mortgage or debt. So if a Medicaid recipient who will continue to live at home and receive in-home care has a home valued at $450,000 with $100,000 still owed on the mortgage, then the equity value is $350,000.

However, one’s land, livestock, equipment, and the operation itself could be counted and may disqualify a farmer from Medicaid eligibility.  What if you’ve leased your farmland and rely on that income to support yourself? That income will count against your eligibility for Medicaid.  Checking and savings accounts, stocks and bonds, and secondary motor vehicles are examples of other ‘countable assets’ that will be considered assets in the Medicaid eligibility calculations. States will have specific exemptions to what can count towards Medicaid eligibility.

Look-Back Period

Giving away one’s assets is not a surefire solution to this problem of Medicaid eligibility. That’s because of what is called the “look-back period.” When calculating one’s assets for their Medicaid application, any gift transfers or transfers of property below market value in the five years before the application are considered and can result in a penalty. A farmer cannot simply gift the farm to heirs in 2024 and expect to qualify for Medicaid prior to 2029–five years from now. This rule requires that farmers planning on gifting or selling assets at a discount price begin their succession planning many years before they want to take advantage of Medicaid or expect to need it.

There are two states where the lookback period is shorter than five years. Those states are California and New York. In 2026, California will no longer use a look-back period, which is currently 2.5 years, or 30 months, and is limited to Nursing Home Medicaid. New York used to have no look-back period for community-based care, but a 2.5-year look-back period for that care will be implemented in 2024 or 2025.

Estate Recovery & Medicaid Liens

Those who receive Medicaid are subject to potential Medical liens, sometimes called estate recovery.  This happens if the expenses exceed the monthly Medicaid allowance. Nursing facilities can place a lien on farmland and recoup nursing facility costs when the property is sold. This repayment can occur while the person receiving care is still alive or after they have passed. Again, the rules governing this process are state-specific.

Other Trusts & Estate Planning

Many estate planning attorneys will recommend using trusts to shield assets from Medicaid asset calculations. However, for these transfers to trusts to be effective, they must be completed at least five years before Medicaid is needed. Of course, farmers won’t know for sure when they will need  Medicaid assistance. This uncertainty can force farmers into an earlier-than-desired decision about when to give up control of their farmland and other assets.

Only irrevocable trusts created during a farmer’s lifetime will help with Medicaid eligibility.  In order for a property to not be considered your property any longer, it must actually no longer be your property. The farmer creating this type of trust will not be able to control the trust property and won’t be able to access the income the trust creates. The beneficiaries of the trust now hold those rights.

Conclusion

There are many other types of irrevocable trusts that are outside the scope of this guide. You may have heard of spendthrift trusts, Miller trusts, spousal trusts, marital deduction trusts, life insurance trusts, or charitable remainder trusts (among others!). A knowledgeable attorney will help guide you to the specific type of trust that will most benefit your situation. However, review the following worksheet to begin to orient yourself to the basic trust options.

Try this: Which Trust Fits Your Goals? (Freely timed or ~20 minutes)

Assuming you want to gift your farm assets to your chosen successor, either in whole or by allowing them to use the property while someone else manages it, we know a trust is the primary vehicle to help you achieve this goal. Now, the only question is, which type of trust?  To help you determine which trust is best for you, we’ve prepared a series of questions.

1. How much do you want to invest in a succession and estate plan? 
   • A few considerations: The Testamentary Trust is the most economical. The Revocable Trust requires more maintenance. The Irrevocable Trust requires more preparation time with a skilled attorney to ensure the choice is correct.
   • The level of finality and complexity of the trust will increase its cost and maintenance requirements. Determine what resources you can put toward creating and maintaining the trust.
2. How much control do you want to exert over the property in the trust? What is it that you want to control?
   • The most amount of control: Revocable Trust. 
   • The terms of the trust can exert some control on how others use the property: Irrevocable Trust and Testamentary Trust.
   • Remember, if you want to retain control, there are a lot of benefits you have to give up on–like Medicaid eligibility or estate tax planning. Make sure to balance all factors!
     
3. Are you ready to hand over ownership of your property? Why or why not?
   • Trusts where ownership is retained in the trust creator – Revocable Trust* and Testamentary Trust* (*until the creator’s death).
   • Trusts that require ownership to be given up completely – Irrevocable Trusts.
   • Succession is a difficult project! Retiring farmers might want to hold onto their property for a variety of reasons and may not be ready to cede ownership to a successor, even in a trust. Other times, this action will be absolutely necessary to help the retiring farmer become eligible for Medicaid or avoid estate taxes.

Tips for Moving Forward

Exploring these questions is very important at the beginning of your succession plan. Clarifying your vision and goals will be helpful when you begin to work with professionals. After reading this section, there are a number of things you need to look into, do, or have conversations about. Here is a partial list of action items for you to consider; add your own action steps at the end. 

• Review retirement resources available to pay for my needs during retirement and any potential need for long term care.
• Determine if my estate is at risk of being taxed at my death (account for any upcoming, predicted changes to estate tax laws and your state’s laws, too).
• Create a timeline for when the retiring farmer would be comfortable relinquishing ownership of farm assets.
• Consult with an accountant or financial advisor to fully understand the tax consequences of transferring any property into trust.