Saving the family-owned business

December 1, 2002 By    

The family business and the family farm are not only a nostalgic part of our nation’s history, but a critical part of our national economy. That’s why perpetuating the family business is such a crucial goal for so many propane company owners across the nation.

The issues that entrepreneurial families face often go beyond those facing the typical, middle-class senior citizens that most attorneys represent. As a business owner you may require the type of legal counsel that can best be provided by attorneys who specialize in this area of the law to ensure the succession of your business.

Having a well-documented estate plan is not nearly enough to ensure the continuation of your business. Often, more than an estate planner is needed.

You should be aware of a highly specialized area of the law ­ elder law ­ that encompasses many different aspects, including: Medicaid eligibility planning; preservation/transfer of assets when a spouse enters a nursing home; Medicare claims and appeals; Social Security and disability claims and appeals; disability planning; conservatorships and guardianships; estate planning, trusts, estate administration and probate; nursing home issues, including questions of patients’ rights; and elder abuse and fraud recovery cases.

Medicaid is a federal insurance program that funds nursing home care, which can cost $3,000 to $5,000 or more each month. To qualify, a husband and wife’s total assets are limited to $2,000 to $6,000, depending on the state in which they live.

If an elderly spouse can no longer be cared for in the home and nursing home care becomes necessary, couples often believe that their only recourse is to sell the family-owned business and “spend down” the net proceeds in order to meet the Medicaid eligibility test.

There are other options, however. A qualified elder law attorney can advise you about both advanced planning opportunities as well as technical steps that may be taken after nursing home needs arise. State agencies that administer the Medicaid program often are not equipped to provide complete advice in these areas.

In some states, for example, business interests are exempt from consideration as an asset if they earn a reasonable, fair market return. Documentation and succession planning are required.

One option for succession planning involves making gifts ­ or outright transfers ­ to children or others. Such a transfer will create a period of ineligibility for Medicaid coverage of nursing home care. The maximum period of ineligibility is three years, regardless of the value of the business interest.

Certain trust arrangements may be appropriate to protect the family business. But traditional revocable living trusts generally do not protect assets or business interests from consideration or estate recovery by Medicaid.

For business owners uncomfortable with outright gifts, an irrevocable trust is another option. It allows the original owner to establish some directives and (possibly) better protect business assets. In exchange for the additional control, the period of Medicaid ineligibility grows to five years.

Income-only irrevocable trusts grant the business owner greater protection than outright transfers to children. They shelter the business interest from creditors of the children by avoiding probate, providing continuity in the event of the children’s death or disability, and by avoiding estate recovery by the Medicaid agency, since the current business owner has no right to the principal of the trust.

Another option in some states is a self-canceling installment note. It allows the business owner to sell the family business in exchange for a promissory note. The note must be payable within the life expectancy of the business owner according to applicable life tables. Upon the death of the business owner, the requirement to repay the promissory note is extinguished.

The planning options for Medicaid coverage of nursing home care depend on each state’s laws and policy. Qualified legal counsel should be retained to evaluate the facts and circumstances of each business, to analyze appropriate options, and to advise the client of the risks and benefits of each option.

One source in finding a local elder law attorney is the National Academy of Elder Law Attorneys’ website.

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