Dear Michael: We have been following your articles about the life estate and how Medicaid has changed life estates from the “income” category to the “asset” category since 2006. We’ve had a life estate since 2011, so I guess our life estate wouldn’t qualify for the grandfather clause. We’ve talked to different attorneys and they said perhaps we should look at a Limited Liability Company to protect our land. What’s your thoughts on an LLC?
– Thought I Was Good.
Dear Thought I was Good: The LLC has really gained popularity in the legal community over the past 10 years. It reminds me of 20 years ago when the Revocable Living Trust was all the rage, and gradually fell out of favor over time. Most Living Trusts weren’t all they were cracked up to be. Even those that started well didn’t get maintained very well over time and soon became just another way to pass property – but still having to pay an attorney to help you do it.
For one to grasp what an LLC is, think of a corporation and how that is constructed. You transfer all of your property to this LLC and now, on paper, your land is owned by this entity, this LLC, and not you directly.
Like a corporation, there are shares that are issued, and these shares can either be owned by you or gifted to your children. You can issue voting and non-voting shares so if you wish to maintain control, you can give your children non-voting shares while you maintain control with the voting shares. This is called an LLLC or Limited (voting) Limited Liability Company.
How does it protect it from long-term care costs? In theory, if a person gave away 99 percent of the shares to their children and maintained only a one percent voting share, then 99 percent of the company assets – your land – would be shielded from Medicaid after the five-year look back period. The income from the LLC is divided by the number of shares issued – same as any corporation – as dividends or pass through earnings.
If your children receive 99 percent of the earnings, everything works well as long as you keep actively farming. You can separate your farming business from the LLC and run that as a sole proprietorship. There you’d have all your machinery, grain, livestock etc. You would have to pay some rent to the LLC for the use of the land so that Medicaid would not declare it a sham and pierce your LLC land values.
The biggest problem is most of us don’t work until the day we die. At some point, actively farming the land may not work. If you have children who farm, you can always work out something with them for income, but if no children are farming, you run into a roadblock. You cannot sublet the land out under the LLC to your child or to anyone else. The LLC rents the land out and, with your children owning the percentage they do, they would receive their share of the LLC income – or rent.
Medicaid still will use the value of your shares as an asset. If you keep too much of the shares, then those share values would be considered an asset at the time you need long-term care financial assistance.
If you don’t keep any or very little of the shares, then all income passes through to your children and you’ll have to live off of something else. You can receive income from the LLC as an employee, but your income would then be subject to self-employment taxes – such as SSI – which is 17 plus percent.
Worse, in North Dakota, if a qualified family member is not farming, the state will disassemble your LLC because LLC’s fall under the ban of North Dakota State Farm Corporations. They are not allowed in North Dakota. South Dakota, Minnesota, yes but not North Dakota.
The biggest problem for most people is letting go of those shares to their children. Once they become the property of the children, then all the bad things children can go through – divorce, bankruptcies, having to sell off their shares – will affect the LLC and/or your income. Most people say it won’t be a problem, but when it comes time to gift out those shares, we see a lot of people rethinking things. Any hesitation and the gift of the shares is still subject to the five-year look back rule, many people will wait too long to gift the shares.
The biggest fear as we get older is having enough income to live on for the rest of your life. Believe it or not, most people rate this fear higher than dying! It’s the reason gifting things away too young may come back to haunt you later.
Next issue we’ll talk about going back to the life estate but preparing yourself for the worst-case scenario. Of all the options, the life estate may still have the most appeal as long as people prepare properly.