Our new resources can help you plan for the future of your farm

Farming takes planning.  A lot of planning.  Whether for next year’s crop, expanding a herd, buying land, constructing buildings, starting a new venture, or upgrading equipment, farmers are nearly always engaged in planning for how to keep the farm on track.  But  farm transition and estate planning—that is, planning for what happens to a farm business and its family from one generation to the next—is a whole different kind of planning.  And it’s one type of planning farmers often avoid.

Farm transition and estate planning can be challenging and uncomfortable, perhaps because it involves dealing with death, uncertainty, and difficult family decisions.  But like planning for the next year of production, farm transition and estate planning is critical to a farm’s success.  With good planning, a farm family can protect farm assets, implement family and business goals, and ensure a smooth transition of a viable operation to the next generation.  It’s the kind of planning that can pay off big. That’s why we’ve written the Planning for the Future of Your Farm law bulletin series, a resource that explains the legal tools and strategies that can address a family’s goals. 

The ten-part series of bulletins in Planning for the Future of Your Farm includes:

  1. Farm Transition Planning: What it is and What to Expect.  The concept of farm transition planning, common terms, what farmers can expect from the transition planning process, and how to prepare for it.
  2. The Financial Power of Attorney.  A Financial Power of Attorney authorizes someone to make financial decisions for another.  We explain the different types and how they can help a farm business.
  3. The Health Care Power of Attorney and Advance Directives.  Medical and end-of-life plans can ease decision making uncertainties for families.  This bulletin explains the Health Care Power of Attorney, Living Wills, Donor Registries, and Funeral Directives.
  4. Wills and Will-based Plans.  A will is a commonly known tool for distributing property.  This bulletin explains different types of wills and how they can be used in a farm transition plan.
  5. Legal Tools for Avoiding Probate.  We review legal tools that transfer assets upon death and avoid probate, including beneficiary designations, payable on death accounts, transfer on death designations, and survivorship deeds.
  6. Gifting Assets Prior to Death.  Gifting is one way to transfer assets to the next generation.  In this bulletin, we discuss how gifting works and when it can be advantageous to incorporate gifting into a transition plan.
  7. Using Trusts in Farm Transition Planning.  Trusts are popular tools in farm transition planning.  In this bulletin, we explain how trusts function and highlight how they can meet family and farm planning needs.
  8. Using Business Entities in Farm Transition Planning.  Many farms have business entities for liability or tax purposes, but business entities can also enable transition of a business to the next generation.  We explain how in this law bulletin.
  9. Strategies for Treating Heirs Equitably.  Whether heirs should inherit assets equally or equitably is a challenging dilemma for parents.  We present strategies for equitable distributions of assets in this bulletin.
  10. Strategies for Transferring Equipment and Livestock.  Equipment and livestock can be more difficult to transfer than other assets.  In this bulletin, we review special considerations and strategies that can help minimize the challenges of these transfers.

Find the entire set of bulletins on the Farm Office website law library at go.osu.edu/farmplanning.  We also cover these topics in our popular Planning for the Future of Your Farm Workshop, offered online and in person each winter.  The next online workshop will begin January 23, 2023–check our Events Page at farmoffice.osu.edu for workshop registration details.  Reading our new bulletins and attending our workshop are two first steps that can help you plan for the future of your farm.

This resource is provided with generous funding from USDA National Agricultural Library, in partnership with the National Agricultural Law Center.

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Coming Soon:  Ohio’s New Beginning Farmer Tax Credits

The idea to use income tax incentives to help Ohio’s beginning farmers gain access to agricultural assets floated around for several years in the Ohio General Assembly.  The idea became a reality when the Beginning Farmer Bill sponsored by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville) passed the legislature, was signed by Governor DeWine and became effective on July 18, 2022.  The law is now in the hands of the Ohio Department of Agriculture (ODA), charged with implementing its provisions.

The new law sets initial eligibility criteria for certifying “beginning farmers,” directs ODA to establish the certification program, and authorizes two types of income tax credits for certified beginning farmers and those who sell or lease assets to certified beginning farmers.  According to ODA, the income tax credits will be available for 2023, once the certification program is up and running.  

Here’s a summary of what to expect from the new law.

Certification of beginning farmers.  The ODA will establish a process for designating a farmer who meets the eligibility criteria to be a “certified beginning farmer.”  The law sets initial criteria for beginning farmers designation but also allows ODA to create additional requirements.  ODA may seek participation from Ohio State and Central State in the certification of beginning farmers. The initial certification conditions are:

  • Resident of Ohio.
  • Seeking entry to or has entered farming within the last 10 years.
  • Farms or intends to farm on land in Ohio.
  • Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
  • Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
  • Provides majority of daily physical labor and management of the farm.
  • Has adequate farming experience or knowledge in the type of farming for which seeking assistance.
  • Submits projected earnings statements and demonstrates profit potential.
  • Demonstrates farming will be a significant source of income for the individual.
  • Participates in a financial management program approved by ODA.

Financial management programs for beginning farmers.  ODA must approve financial management programs that meet the certification requirement, in consultation with Ohio State and Central State.  The list of approved programs will be available on ODA’s website.

Income tax credits for certified beginning farmers.  An individual who attains certification as a beginning farmer may apply for a state income tax credit equal to the cost incurred during the calendar year for participating in an ODA approved financial management program or a substantially equivalent financial management program approved by the USDA.  The tax credit is nonrefundable.  If the tax credit exceeds the beginning farmer’s tax liability in the year granted, the excess can carry forward for not more than three succeeding tax years.

Income tax credits for owners who sell or rent assets to certified beginning farmers.  An owner who sells or rents “agricultural assets” to a certified beginning farmer during the calendar year or in either of the two preceding calendar years may apply for a state income tax credit.  The credit will be equal to 3.99% of the sale price or the gross rental income received during the calendar year for either a cash or share rental agreement. “Agricultural assets” includes agricultural land (at least 10 acres and in agricultural production or earning $2500 in average yearly gross income from agricultural production if under 10 acres), livestock, facilities, buildings, and machinery used for agricultural production in Ohio. The owner cannot be an equipment dealer, however, nor can the certified beginning farmer receiving the assets be a partner, member, shareholder, or trustee of the owner of the assets.  Rented assets must be rented at prevailing community rates, as determined by ODA in consultation with the Ohio tax commissioner. The tax credit is nonrefundable but may be carried forward for seven succeeding tax years if it exceeds the owner’s tax liability.

Time to plan.  As we await ODA’s rules and procedures for the new tax credits, beginning and existing farmers can use this time for planning.  Review the new law with your attorney and accountant to determine how the income tax credits could affect you.  If you are a beginning farmer seeking agricultural assets, spend time trying to connect with an existing farmer who is ready to sell or rent agricultural assets.  Although the 3.99% credit for those transfers may not sound significant, run the numbers and see how they could play out.  The hope of the new law is that those numbers will be enough to help a beginning farmer have greater access to those important assets that are critical to farming in Ohio.

Information on House Bill 95, the Beginning Farmer bill, is available at this link

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Avoiding Probate – Not as Hard as You Might Think

As anyone who has been an executor of an estate or has had to deal with an estate knows, the probate process can be slow, cumbersome and expensive.  Fortunately, much probate, and sometimes all probate, can be avoided with some planning and diligence.  The following is a brief discussion on how to avoid probate with different types of assets.

Real Estate

Survivorship Deeds.  Ohio law allows co-owners of real property to pass their share of the property to the surviving co-owner(s) upon death through a survivorship deed, also referred to as a “joint tenancy with survivorship rights.”  This type of deed is common in a marital situation, where the spouses own equal shares in the property and each becomes the sole owner if the other spouse passes away first.  The property deed must contain language such as “joint with rights of survivorship”.

Transfer on Death Affidavit. Another instrument for designating a transfer of real property upon an owner’s death is the “transfer on death designation affidavit.” This affidavit allows property to pass to one or more designated beneficiaries if the owner dies.  The process is simple, it requires the owner to complete an affidavit and file it with the recorder in the county where the land is located.  Upon the owner’s death, the beneficiary records another affidavit with the death certificate and the land is transferred without probate.

Vehicles

Ohio law also allows motor vehicles, boat, campers, and mobile homes to transfer outside of probate with a transfer on death designation made by completing and filing a Transfer on Death Beneficiary Designation form at the county clerk of courts title office.  There is a special rule for automobiles owned by a deceased spouse that did not include a transfer on death designation. Upon the death of a married person who owned at least one automobile at the time of death, the surviving spouse may transfer an unlimited number of automobiles valued up to $65,000 and one boat and one outboard motor by taking a death certificate to the title office.

Payable on Death Accounts

All personal financial accounts, including life insurance, can include payable on death beneficiaries.  The beneficiaries are added by using forms provided by the financial institution.  Upon the death of the owner, the beneficiary completes a death notification form and submits to the financial institution with a death certificate.  The beneficiaries are then provided the funds held by the account.

Business Entities

The many advantages of using business entities are well known but avoiding probate is an often-overlooked attribute of business entities.  Ohio law allows business entity ownership to be transferred outside of probate by making a transfer on death designation.  This is most commonly done with ownership certificates or within the operating agreement.  Upon the death of the owner, the ownership is transferred to the designated beneficiary with a simple transfer business document.  

Non-Titled Assets

Farms have many untitled assets such as machinery, equipment, livestock, crops, and grain.  These assets can be made non-probate, but it will require either a trust or a business entity.  For example, machinery can be transferred to an LLC.  Then, the LLC ownership is made transfer on death to a beneficiary.

Ohio law allows probate to be avoided relatively easily.  Estates worth many millions of dollars can avoid probate and make the administration easy.  However, the owner of the asset must take the time and make the effort to change the title or add a beneficiary.  An attorney familiar with estate planning can assist with making sure all assets are titled to avoid probate.  The executor and the heirs of the estate will appreciate having little or no probate to deal with.

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Ohio Farmland Leasing Update is August 10

Is it time to start thinking about your farmland lease for next year?  We think so!  There are new legal issues and updated economic information to consider for the upcoming crop year.  That’s why we’ve scheduled our next Ohio Farmland Leasing Update for Thursday, August 11 at 8 a.m.  Join the Farm Office team of Barry Ward, Robert Moore and Peggy Hall for an early morning webinar discussion of the latest economic and legal farmland leasing information for Ohio. 

Here are the topics we’ll cover:

  • Ohio’s new statutory termination law for verbal farmland leases
  • Using a Memorandum of Lease and other lease practice tips
  • Economic outlook for Ohio row crops
  • New Ohio cropland values and cash rents survey results
  • Rental market outlook

There’s no cost to attend the Zoom webinar, but registration is necessary.  Visit https://go.osu.edu/farmlandleasingupdate for registration.  And if you’re already thinking about your next farmland lease, also be sure to use our farmland leasing resources on https://farmoffice.osu.edu.    

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Assessing Long Term Care Risks

As discussed in prior posts, Long Term Care (LTC) costs are a financial threat to many farms.  On average, each person can expect to spend around $100,000 on LTC during their lifetime.  Some people will be lucky and never spend one dollar on LTC while others will require many years of expensive nursing home care.  This great difference in potential LTC needs and costs are one of the reasons LTC planning is so difficult.  We can never be sure what the actual LTC costs will be.

The best we can do is assess the risk to each farm on a case-by-case basis.  The assessment asks: What is each farm’s ability to absorb the average LTC costs and absorb an outlier scenario of several years in a nursing home?  When we know what the actual risk is to that specific farm, we can make better informed decisions as to the best LTC management strategy to implement.

The risk analysis looks at the potential costs of LTC and the ability of the farm to pay for those costs.  Paying LTC costs is a function of available income and assets that can be liquidated to pay for LTC costs not covered by income.  Generally, the assumption is that farmers will first use savings to pay LTC costs not covered by income, then non-real estate farm assets and then lastly real estate.  That is, the land is the last asset that a farmer will typically spend to pay for LTC costs.

To start the assessment, a realistic forecast should be made regarding available income.  It is important to keep in mind that if someone is receiving LTC, there is a good chance they will not be able to operate a farm.  So, income should probably be based more on potential retirement income than income from an operating farm or wages.  All available sources of income should be included such as retirement accounts, investments, land rents, and the sale of operating assets. The income forecast needs to be based on after-tax income. 

The income forecast is then compared to potential LTC costs.  The easiest, and most conservative comparison is between income and nursing home costs.  The most expensive type of LTC is a nursing home, so using nursing home costs is a worst-case scenario.  The first question becomes: is income adequate to cover potential LTC costs?

If there is adequate income to pay for LTC costs, other assets are not at risk.  Additionally, no further LTC planning likely needs done.  Assets are only at risk to LTC when income is inadequate to cover the costs.

For many farms, income alone will not pay for LTC costs.  In these situations, the next step is to determine how long savings will cover the deficiency.  By dividing the available savings by the income deficiency, we can determine how many years of LTC will be covered by savings.  If the savings will cover average LTC costs and outlier scenarios, then all remaining assets are likely protected.

Consider the following example.  Joe is unmarried and a farmer.  He forecasts his retirement income to be $50,000 after taxes.  He has $500,000 in savings and investments, $500,000 in machinery and equipment and $2,000,0000 in land.  He assumes that a nursing home will cost $100,000/year.  His income is $50,000 short of covering the nursing home bill.  He will need to use his savings to cover the deficiency.  He can pay for ten years of nursing home costs before his savings is depleted.

The average male will require about 2.2 years of LTC.  Joe can pay for almost five times the average stay by using income and savings.  Joe’s risk analysis shows that if he is willing to use his savings, his farm assets are at low risk of being consumed for LTC costs.  It is unlikely that Joe will need more than ten years of LTC.

Many farms do not have much savings or investments as all the money goes back into the farm.  In these situations, operating assets may need to be liquidated to pay for LTC.  Like the income forecast, available operating assets should be valued as after-tax.

Consider the same example as above but Joe only has $50,000 in savings.  In this scenario, his savings will only pay for one year of LTC.  After that, he would need to sell machinery to help pay for his care.  The machinery will pay for ten years of care.  In this risk analysis, Joe’s savings and machinery are at risk to LTC costs.  However, his land is likely safe unless Joe requires more than ten years of nursing home care, which is unlikely. 

In this situation, Joe may decide that he is not willing to risk his machinery and transfers it to an irrevocable trust or implements some other strategy to protect it from LTC costs.  If he protects his machinery, he will also need to do the same for his land.

If income, savings and operating assets are insufficient to cover LTC costs, then land is at risk.  As stated above, this is almost always the asset most important to farmers and the asset requiring the most protection.  If the risk analysis shows that the land is likely at risk to LTC costs, farmers will often take action to protect the land.  Protecting the land may include gifting to heirs or transferring to an irrevocable trust.

Using the same example again, except Joe quit farming several years ago and does not own any machinery.  Using his savings, he can only pay for one year of LTC before his land is at risk.  Joe decides to gift his land to his children to avoid having to spend it down for LTC.  Joe decided upon an aggressive LTC plan due to his land being exposed to significant risk from LTC.

It should be noted that gifting assets or transferring assets to an irrevocable trust has many LTC implications and tax implications.  For example, gifting away assets can cause Medicaid ineligibility for up to five years and can have negative tax implications for heirs.  Considerable thought and analysis should be undertaken before gifting assets or transferring to an irrevocable trust.  Remember that there are disadvantages to gifting assets or transferring to an irrevocable trust.

The examples above use a relatively simple scenario using a single person to explain the concept of risk assessment.  For married couples, the assessment is more complicated because we now have the possibility of two people having LTC costs.  Additionally, not all income can be allocated to LTC if one spouse remains at home with continuing living needs.  

As the above discussion shows, until a risk assessment is performed, it is difficult to know what strategy to implement.  When income and/or savings is adequate to cover many years of LTC, there may not be a need for aggressive LTC planning.  If income and savings will only cover LTC for a short period of time, aggressive planning may be needed to protect assets.

An attorney familiar with LTC issues can be helpful with the risk assessment.  Before transferring assets or implementing the plan, an attorney should be consulted.  LTC planning can be complicated and technical.  Implementing the wrong plan can make things even worse.  A small investment in legal fees is worthwhile to be sure your LTC plan is the correct plan for your farm.

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A glimpse at farming and legal issues in Scandinavia

I had the good fortune recently to attend the International Farm Management Congress in Copenhagen, Denmark, along with the pre-conference tour of farms through Norway and Sweden. It was not only a beautiful trip, but an opportunity to view farming practices and legal issues in other parts of the world.  Some practices and issues were surprisingly familiar while others were quite different.  As I visited farms interacted with farm operators and agricultural business owners, I developed a list of observations about the similarities and differences.  Here are a few of those observations.

  • Farmland should stay in the family.  Very old “allodial” and “concession” laws in Norway and Sweden prevent agricultural property from being sold outside the family or divided into smaller parcels and grant the eldest heir the right to inherit the property. It works.  We visited several farms that had been in the same family for 12 to 14 generations.
  • Environmental compliance and sustainability goals present both challenges and opportunities.  Norway, Denmark, and Sweden have aggressive goals to reduce carbon emissions.  While some businesses noted the challenges of complying with air and water regulations, they were committed to change because consumers want “more sustainable” products and experiences.
  • Agritourism includes sleepovers.  We visited several farms that capitalize on people’s desires to be on a farm, but they also include opportunities to stay over in a hotel or “caravan park” (campground) on the farm, and several also offer spa experiences.  The “farm stay” concept that is so common in Scandinavia is just now beginning to spread across the U.S.
  • Animal welfare laws concern livestock operators.  As we see here in the U.S., new regulations on livestock housing have affected the bottom line of operators forced to make housing changes.  Several operators noted the financial challenges of complying with new requirements, with some choosing not to continue under the new laws.
  • Cooperative models are thriving.  We visited a cooperative for fruit and vegetable producers in a mountain region of Norway, a sheep farm that developed a slaughterhouse to manage processing for other local livestock operators, and a start-up processing facility for pea and legume growers in Sweden, all using cooperative business structures similar to ours here in the U.S.

While some of the issues vary in Scandinavia, the attachment to farming is not all that different.  One of my favorite quotes from the trip illustrates the similarity.  The father in a father-son operation stated to us: “We are proudly farming, growing wheat and potatoes and having chickens.”  Proudly farming—a practice shared by U.S. and Scandinavia farmers alike, in the midst of varying legal issues and opportunities.

Learn more about the International Farm Management Association at   https://www.ifma.network/.  The next IFMA Congress takes place in 2024 in Saskatchewan, Canada. 

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Right of First Refusals

A Right of First Refusal (ROFR) is a contract between the owner of the real estate and the person who is receiving the right to purchase (Holder).  If the owner wishes to sell or transfer the property, the Holder has a legal right to purchase the property subject to the terms and conditions of the ROFR.  If the Holder does not exercise their right to purchase the property, the owner can transfer the property to the third-party buyer. A ROFR can be an effective way to help keep land ownership in the family.

A ROFR can be established in a number of ways including on a deed.  However, in most situations the best method of creating a ROFR is a stand-alone document that is recorded with the county recorder.  By using a separate document, the terms and conditions of the ROFR can be clearly expressed to avoid future confusion or conflict.

There are a number of terms and conditions to include in a ROFR.  Perhaps the most important term is how to determine purchase price.  One way to establish the purchase price is by matching a bona fide offer.  Upon receiving an offer to purchase the land, the owner offers to sell the land at that same price to the Holder.  If the Holder declines to purchase the land at that price, the owner is free to sell to the third party at that price.

Another way to establish the purchase price is by appraisal.  If the appraisal method is used to establish the purchase price, a multi-step approach should be considered to avoid the effect of an outlier appraisal.  For example, the owner can obtain and appraisal first.  If the Holder objects to the owner’s appraisal, the Holder can obtain an appraisal of their own.  If the two appraisals do not match or not within a certain percentage of each, the owner and Holder agree on a third appraisal.  After the third appraisal is conducted, the middle appraisal of the three establishes the purchase price.  Also, any qualifications for appraisers, such a licensed or unaffiliated with the parties, should be included in the terms.

Sometimes both the offer matching and appraisal will be used in a ROFR to establish the purchase price. Terms may include using the lesser of an offer and an appraisal for the purchase price.  Or, if there is no offer and the owner would like to sell, then the appraisal method is used to establish the purchase price.  The important thing is to make it very clear how the purchase price is established to avoid disputes between the owner and potential buyer.

Timelines should be included in the ROFR.  Timelines should be included for:

  • Number of days to provide an offer to the Holder
  • Number of days to establish the purchase price by appraisal
  • Number of days to accept or reject an offer by the Holder
  • Number of days to close the purchase

An additional term to consider is what transfers are exempt from the ROFR.  The owner of the land may want to be able to transfer to their family or spouse without triggering the ROFR.  Therefore, the ROFR should specifically state any transfers that are exempt.  The most common exempt transfers are those transfers to descendants and spouses.

Another important provision is the length of term of the ROFR.  The ROFR should have a limit on its term whether it be a number of years or for the life of the owner.  A ROFR that goes on generation after generation can cause big problems for a future owner because the Holder or their heirs may be difficult to find and/or cooperate.

Consider the following example of a common way in which a ROFR is used.

Mom and Dad want to gift five acres to their daughter, Jane, so that she can build a house.  Mom and Dad’s only concern is that they do not want the five acres to leave the family because it sits in the middle of their farmland.  Mom and Dad gift the five acres to Jane and enter into a ROFR at the same time.  The ROFR requires Jane to offer Mom and Dad the first chance to buy the five acres before Jane transfers it.  An exception is made that Jane may transfer the land to her children without triggering the ROFR.  The purchase price is established by a three-step appraisal price with the appropriate timelines included.  The ROFR will be in effect for the next 30 years and then will expire.

The ROFR gives Mom and Dad the assurance that Jane will not be able to simply sell the property to someone outside of the family.  Without the ROFR, Mom and Dad may be reluctant to gift the land for fear of Jane transferring the land to someone else.  The ROFR allows Jane to have full ownership of the property and the discretion to build a house as she wishes but also protects Mom and Dad from having an unwanted neighbor.

ROFRs can be effective in real estate transfers, particularly among family members, and in estate planning.  Keep ROFRs in mind the next time you are considering transferring real estate or as you design your estate plan that includes real estate.  A ROFR should be drafted with the assistance of an attorney to be sure that all the important terms and provisions are included, and it is executed and recorded property.  

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A Look at Long-term Care Impacts on Farming Operations

Do you worry about the possibility of long-term care needs and how those needs might affect your farming operation or family farmland?  We’ll examine that issue in an upcoming webinar for the National Agricultural Law Center.  Join OSU Attorney and Research Specialist Robert Moore for the webinar, “Long-Term Care Impacts on Farming Operations.”

Long-term care costs can be a significant threat to family farming operations. Nursing homes can cost around $100,000 per year, an expense that some farms cannot absorb while remaining viable. That’s why many farmers believe long-term care will force the sale of farm assets, including farmland.  But statistics and data indicate that, on average, this may not the case and that the average farmer can likely absorb the costs of long-term care.  However, few farms can withstand the outlier scenario:  where many years are spent in a long-term care facility.

In this webinar, Robert Moore will explore the costs and likelihood of needing long-term care.  Using this data, he will analyze normal scenarios and the dreaded outlier scenarios of long stays in nursing homes.   By understanding the actual risks of long-term care costs, we can better understand and assess strategies that can mitigate long-term care risks. Robert will review several strategies attorneys can use to lessen the exposure of farm assets to long-term care costs.

The National Agricultural Law Center (NALC) will host the webinar at noon on July 20.  OSU’s Agricultural & Resource Law Program is a research partner of NALC, and Robert’s work is the result of funding provided by the USDA National Agricultural Library through our partnership with NALC.

There is no fee for the event, but registration is required.  Register at https://nationalaglawcenter.org/webinars/longtermcare/.

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Estate Planning Without Using Wills or Trusts

When we think of estate planning our thoughts usually go to a will or trust.  However, in some situations, an effective estate plan can be implemented without the use of a will or trust.  Using transfer on death or payable on death beneficiary designations, for some people, can be an adequate estate plan.

A transfer on death or payable on death designation can be added to almost any asset with a title.  Transfer on death is used more for tangible assets such as land and vehicles while payable on death is used more for intangible assets such as financial accounts and life insurance.  Both designations do the same thing – upon death, ownership is transfer from the deceased to the designated beneficiary outside of probate.  This process of transferring ownership at death is usually simple and relatively easy.

The strategy of using beneficiary designations as the primary estate planning tool is best used when the distribution plan of assets is simple.  For example, when the deceased’s assets will be divided equally among their children.  Distributions plans that include more involved schemes such as unequal distributions, buy outs, leases or rights of first refusals are too complicated to use just beneficiary designations.  In those situations, a trust-based plan will likely be needed.  Using beneficiary designations as the primary estate planning strategy only fits a narrow band of farmers, but for those farmers and it can be an effective and relatively inexpensive plan.

Consider the following example.  Mom and Dad’s farming operation is an LLC that holds farm machinery, livestock, and crops.  They own 200 acres in their names.  Their other assets include a bank account, retirement account and life insurance.  At Mom and Dad’s death, they want all of their assets to go to their two children equally.  Their net worth is $4 million.

In this example, the first thing to notice is that Mom and Dad are well under the federal estate tax limit.  So, their estate plan does not need to be designed around minimizing estate taxes.  Second, their plan is simple.  Everything goes to their two children equally.  Lastly, the assets they own are all titled assets that can include death beneficiary designations.

Mom and Dad can title their LLC ownership transfer on death to the children.  Upon their deaths, the LLC ownership interests will transfer to the children outside of probate. The transfer is done with a few pieces of paper.  The land can be made transfer on death by recording a Transfer on Death Affidavit.  Upon Mom and Dad’s death, the children will record an affidavit with a death certificate and title is transferred – again, without probate.  The children can be added as the payable on death beneficiaries of the financial accounts and life insurance.  After death, the children will file paperwork with the financial institutions and funds will be transferred to them outside of probate.  A $4 million estate has been transferred without the need to use a will or trust and probate has been avoided.

While this strategy does not use a will or trust for the transfer of assets, it is still a good idea to have a will as a backup.  In the above example, Mom and Dad execute wills that state all of their assets go to their children equally.  The will is there in case a beneficiary designation is in error or an asset is overlooked and must go through probate.  The goal is not to use a will but there should be one as a backup just in case Mom and Dad forgot to add a transfer on death designation to the old livestock trailer that they haven’t used in five years.

The following assets can all have transfer on death or payable on death designations added to their title: vehicles, titled trailers, trucks, boats, real estate, bank accounts, financial accounts, life insurance, stocks, and business entities.  Assets such as livestock, grain, crops and machinery are untitled so a transfer on death designation cannot be added.  However, transferring those untitled assets into an LLC is a great way to essentially convert untitled assets to titled assets.  After the untitled assets are transferred to the LLC, the LLC ownership can include a transfer on death designation.

When considering estate plans, farmers who have relatively simple plans and can add death beneficiary designations to all or most of their assets may not need a complicated will or trust.  The beneficiary designations can be the primary estate plan with a simple will as backup.  This strategy is effective, minimizes legal costs and avoids probate. As stated above, this strategy is not for everyone, but it should be considered.  For more complicated plans or for high-net-worth individuals, a trust may be needed.

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What Assets are Subject to Divorce?

A well-known statistic is that one-half of all marriages end in divorce.  While there is some debate as to the accuracy of this statistic, there is no doubt that many marriages do end in divorce.  According to Ohio law, all marital assets are to be divided equitably in the event of a divorce.  Equitable does not necessarily mean equal although an equal division of assets between the spouses is often the result.  It is important to note that only martial assets are subject to the equitable division between the spouses.  Non-marital assets, or separate assets, are retained by the spouse who owns the asset.

Separate assets include the following:

  • An inheritance received by a spouse during marriage
  • A gift received by a spouse during marriage
  • Property acquired by one spouse prior to the date of marriage
  • Passive income and appreciation from separate property by one spouse during marriage

The above list would seem to make it an easy exercise to determine what are marital assets and what are separate assets in a divorce.  However, like many legal issues, this is often not the case. Determining whether an asset is a marital assets or a separate asset can be complicated.  For example, Ohio law also provides that the following is a marital asset:

“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage.”

So, it is possible for an asset to be partially a marital asset and partially a separate asset.

Consider the following example:

Andy and Beth are farmers and in the process of divorcing.  Shortly after they were married, Beth inherited a 100-acre farm from her grandmother. When she inherited the farm, it was valued at $600,000.  A few years after inheriting the farm, $80,000 of drainage tile was installed on the farm paid for by Andy and Beth’s farming operation.  The current value of the farm is $1,000,000.

In this example, when Beth initially inherited the farm it was a separate asset.  However, the tile that improved the quality and value of the farm was paid for by Andy and Beth’s joint farming operation.  Therefore, Andy likely has a valid claim that at least part of the $400,000 increase in value is a marital asset due to the tile installation paid for by money earned during the marriage.

Perhaps Andy further argues that most of the increase in value was due to the fertilizer, tillage and other soil improvements made while Andy and Beth farmed the land.  Andy’s argument tries to make the entire $400,000 increase a marital asset.  Conversely, Beth argues that the land value increase was not actually earned during marriage but was merely a passive value increase due to market pressure and nothing that Andy did. Beth’s argument tries to make most of the $400,000 increase a separate asset.

As this example illustrates, an asset that is initially a separate asset can become, at least in part, a marital asset.  Both Andy and Beth have valid arguments as to their positions.  It is not hard to imagine how much time and legal fees could be spent resolving or litigating the issue in a contentious divorce.

People who own significant assets prior to marriage or may inherit assets during the marriage should consider a prenuptial agreement that will clearly identify which assets are to be marital and which assets are to be non-marital.  If the couple did not enter into a prenuptial agreement, the spouses should be careful not to taint any assets they wish to keep separate. For farm assets, this may be difficult due to the nature of improving the assets as part of the farming operation.  For some non-farm assets, such as financial accounts, it may be easier to maintain the separate status of the assets.

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