Part 2: Long-term care costs: what are the odds?

Thursday, April 28th, 2022
Farmer holding clipboard with tractor in background and Legal Groundwork Series title

We discussed long-term care (LTC) costs in our April 20 blog post and analyzed recent data to project that a 65-year-old Ohioan, on average, can expect about $100,000 in LTC costs, and double that for a married couple.  In this post, we continue to examine LTC costs by addressing an important question for farmers:  can the average farmer absorb this cost without jeopardizing the farm and farm assets? 

First, we need to remember that any income received by the farmer could be spent on paying the LTC costs.  Farm income, land rent, social security income, and income from investments can all pay for LTC costs.  After income is used to pay for LTC care costs, non-farm assets, like savings, can be used to pay for the costs. It’s the portion of the LTC costs that income and savings cannot cover that causes farm assets to be at risk.  For example, if the farmer has $40,000 in savings, using that savings to pay LTC leaves only $60,000 of farm assets at risk.

Let’s next turn to the risk to farm assets.  While a farmer would never want to sell any farm asset to pay for LTC, their land is probably the last asset they would want sold.  Most farmers would sell grain, crops, livestock, and machinery before they would sell land.  So, if income and savings cannot pay for LTC care costs, how at risk is the land?  Data can also help us answer this question.  According to the Economic Research Service – USDA (ERS), the total amount of non-real estate, farm assets owned by farmers in the US for 2020 were as follows:

                        Financial Assets                                 $92,013,020,000

                        Inventory (crops, livestock, inputs)      $62,866,872,000

                        Machinery                                          $278,809,055,000

                        Total Non-Real Estate Farm Assets   $533,688,897,000

The ERS further estimates that there were 2.02 million farmers in the US in 2020.  So, on average, farmers owned $264,202 of non-real estate, farm assets.  If income and savings are unable to pay for LTC costs, the average farmer would have an additional $264,202 of assets to sell before needing to sell real estate. 

So, what does all this data tell us?  On average, if farmers are forced to sell farm assets to pay for LTC, they will not need to sell their land.  They may need to sell crops, livestock and/or machinery to help pay for the LTC costs but the land is probably safe.  That is the good news.

The bad news is the above analysis is all based on averages.  When dealing with large numbers, averages are very useful.  We can say with some confidence that on average, a 65-year-old farmer in Ohio will spend around $100,000 on LTC.  However, the numbers cannot tell us with any certainty what a specific farmer will spend on LTC. Farmer Smith in Delaware County, Ohio might never pay any LTC costs, might pay the average of $100,000 or they might be an outlier.  An outlier is someone whose specific circumstances end up being significantly different than the average.

Being an outlier is what farmers are really concerned about regarding LTC.  We all know someone, or have heard of someone, who was in a nursing home for 10 years.  That’s close to $1 million in LTC costs.  Few farmers have the income, savings and non-real estate assets to pay for $1 million of LTC. 

So, what LTC planning for farmers really ends up being is protecting against the outlier scenario that puts the land at risk.  Most 65-year-old farmers would probably sleep well at night if they knew they would only have $100,000 of LTC costs for the rest of their lives.  That amount of LTC costs is probably not going to cause a farm liquidation.  What keeps farmers up at night is the chance they will be the outlier and spend 10 years in an expensive nursing home.

The outlier scenario is important for farmers to understand as they develop their LTC strategy.  For any risk management plan, the true nature of the risk must be understood and not just presumed.  The fact is most farms can probably withstand the average LTC costs.  It is also factual that most farms cannot withstand an outlier scenario of being in a nursing home for many years.  This understanding is critical in developing a LTC plan.  That is, the LTC plan should probably seek to mitigate the risk of being an outlier, not on being average.

Fortunately, there are strategies to help mitigate the risk of losing the farm to the outlier scenario, although each of the strategies have significant drawbacks.  In future posts, we will discuss those strategies.