Estate and Transition Planning

By: Robert Moore, Tuesday, September 27th, 2022

Legal Groundwork

For people who are concerned about potential long-term care (LTC) costs, LTC insurance may be an option.  Several insurance companies sell these policies that pay out to cover some or all LTC costs.  There are many different types of policies and coverages available.  For example, some coverages may start soon after LTC is needed while some coverages will not begin to pay for a longer period, sometimes as long as one year.  Also, some policies are combined with a death benefit so that the policy holder can be sure that at least some benefit will come from the policy.   The following are some, but not all, of the terms and conditions to consider when exploring a LTC insurance policy:

Duration of Benefits.  Most policies cover at least one year and may cover up to five.  Policies that cover more than five years are no longer available.  Obviously, a longer-term policy is preferable but that must be balanced against the higher premiums.

Benefit Triggers.  The LTC policy will only start to pay out when certain triggers, or conditions, are met.  Before paying out, most policies require the policy holder to need assistance with at least two of the following activities: bathing, dressing, toileting, eating, transferring and continence.  Be sure to understand what conditions are required for payout to be triggered.

Waiting Period.  Policies will include a waiting period.  The waiting period may be a few days or as long as one year.  The longer the waiting period the lower the policy premiums will be.  

Daily Benefit Amount.  A LTC policy will include a daily benefit amount.  Some policies may pay 100% of the daily LTC costs.  Other policies may only cover 50% of the LTC costs.  The policy can be used to cover only that portion of LTC costs that income does not.

Inflation Protection.  Like any cost, LTC costs will increase over time.  Some policies will have inflation adjustment built in and automatically increase over time.  Other policies will offer the holder the ability to increase the coverage to keep up with inflation but this will also increase the premium.  It is important to know what type of inflation adjustment provision is in a policy.

Depending on the type of policy and robustness of coverage, LTC policies can be expensive.  Not everyone will be able to fit LTC policy premiums into their budget.  Also, not everyone is insurable.  People with significant pre-existing health care issues may not be able to obtain a LTC policy.

If a policy can be obtained to cover all LTC costs or at least cover the deficiency that income does not cover, all assets will be protected.  Therefore, the owner can keep all their assets and continue to enjoy and use them for the remainder of their lives.  LTC insurance policies, in many ways, provide the most flexible LTC plan.

It is worthwhile to at least explore incorporating a LTC insurance policy into a LTC management plan.  Many insurance agents and financial advisors can provide free estimates for policies without too much difficulty.  They can also help with a risk assessment to determine what policy may be needed for a given circumstance.  Before assuming that assets must be gifted or transferred to protect them, the possibility of LTC insurance should be explored.

Posted In: Estate and Transition Planning
Tags: long-term care
Comments: 0
By: Robert Moore, Thursday, September 22nd, 2022

Legal Groundwork

End-of-life decisions and directives can be one of the hardest parts of estate planning.  However, having an advanced directive can save your loved ones much stress and anguish in an already difficult time.  The end-of-life directives are typically completed as part of the estate planning process but can be done at any time, independent of the estate planning process.   

An end-of-life directive can be included in a Health Care Power of Attorney (HCPOA).  The HCPOA is a document that identifies a person (Agent) who has authority to act for someone (Principal) when the Principal is not able to act for themselves.  An end-of-life directive in a HCPOA gives the Agent authority to withdraw artificial life support. However, the Agent is only permitted to withdraw life support if two physicians have determined that the Principal is permanently unconscious.

A Living Will can also be used as the end-of-life directive.  This document states that in the event two physicians have determined a person to be permanently unconscious, the physician or hospital is directed to withdraw artificial life support.  The Living Will is essentially a person’s statement that they do not want to be kept on life support.

There are usually two different lines of thinking when it comes to deciding between the HCPOA and Living Will for the end-of-life directive.  Generally, the decision to use the HCPOA as the end-of-life directive sounds something like: “this is a really important decision, I want a family member involved”.  With a Living Will, the thought is: “I don’t want to burden my family with the end-of-life decision, I don’t want to be kept on life support”.

There is no right or wrong answer as to whether to use a HCPOA or Living Will as the end-of-life directive.  However, it is important to make the decision and have an end-of-life directive in place.  In an already difficult and stressful time, the end-of-life directive will lessen the burden on your loved ones by expressly stating your wishes as to artificial life support.

Normally, it is advisable to have an attorney draft legal documents.  However, the HCPOA and LW are documents that can be completed without the assistance of an attorney.  A few years ago, the medical community and legal community cooperated to develop a standard form for the HCPOA and Living Will.  These documents can be downloaded from the internet and completed relatively easily. The HCPOA can be downloaded at https://my.clevelandclinic.org/-/scassets/files/org/medicine-institute/health-care-power-of-attorney-form.pdf?la=en and the Living Will can be downloaded at https://my.clevelandclinic.org/-/scassets/files/org/medicine-institute/ohiolivingwill.pdf?la=en .  Each document includes an explanation and instruction section.

If you do not have an end-of-life directive in place, do your loved ones a favor and complete one now. Having an end-of-life directive will help your loved ones deal with a difficult situation a little more easily.

By: Robert Moore, Thursday, September 15th, 2022

Legal Groundwork

When going through the estate planning process, determining and implementing the terms and conditions of the will or trust consume the most time.  However, some thought and consideration should be given to the Power of Attorney (POA) documents that are typically completed at the same time as the will or trust.  The POA documents designate who may act on behalf of someone who is alive but unable to act for themselves.   These documents are very important, especially for those people who are operating farms and businesses.

There are generally two types of POAs – financial and health care.  The financial POA is sometimes called a General Power of Attorney or Durable Power of Attorney.  Regardless of the name, the financial POA designates who may act (Agent) on behalf of the person who is incapacitated (Principal).   Most financial POAs give the Agent full authority to manage any and all assets owned by the Principal.  Due to this broad authority, the financial Agent has significant power and control and thus should be someone in whom the Principal has complete confidence and trust.

It is possible to limit the scope of authority for the financial POA.  Perhaps the Principal gives authority to the Agent to manage all assets except real estate so that the Agent cannot sell any of the Principal’s farmland.  Or, perhaps the Principal gives authority to manage all non-farm assets to one person and authority to manage all farm assets to another person.  The POA can be customized to meet the goals and objectives of the Principal.

One of the more important terms of the financial POA is when it become effective.  There are basically two options:  the POA can become effective when the Principal becomes incapacitated or become effective immediately upon execution of the POA.  Let’s discuss the advantages and disadvantages of each.

Having the POA become effective only when the Principal becomes incapacitated ensures that the Principal will maintain full control over their assets while they maintain capacity.  The Agent has authority over the Principal’s assets only after the Principal has become incapacitated.  Typically, incapacity is determined by a physician after an examination of the Principal.

A logical question is: why would you ever want your POA to become effective until you become incapacitated?  There are two reasons.  First, a person who becomes mentally incapacitated is usually the last person to know it.  That is, people with dementia or other mental problems will usually not admit they are unable to make decisions for themselves.  Additionally, getting the person who may be incapacitated to visit a doctor to be examined for incapacity may be very challenging.  So, making the POA effective upon signing may save the Agent much frustration and grief by not having to get an incapacity determination from a doctor.

Consider the following example.  Bill is not married and names his niece, Cathy, as his financial POA.  Bill has always been a little suspicious of everyone so he causes his POA to become effective only upon his incapacity.  Bill develops a medical condition where he becomes unconscious and thus is obviously incapacitated.  Cathy’s authority as Bill’s Agent becomes active and she can begin managing his assets and paying his bills.

Let’s change the scenario a bit to show why the time of effectiveness is important.  Bill starts to show signs of dementia and begins to make bad decisions with his money.  Bill starts giving his money away to unscrupulous people and making poor business decisions.  Cathy sees this happening but cannot convince Bill to see a doctor for a capacity determination.  The more Cathy asks about seeing a doctor, the more upset Bill becomes because “there is nothing wrong with me, it’s my money I can do what I want with it!”.  By the time Bill is actually deemed to be incapacitated by a doctor, much of his hard-earned wealth has been squandered.

The second reason to consider having the financial POA effective upon execution is convenience.  Sometimes, someone may be perfectly healthy but due to travel or a busy schedule may need someone to act on their behalf.

In this example, Bill has named Cathy as his POA and the POA is effective immediately.  Bill is in the process of selling a farm and the closing has been scheduled in the middle of Bill’s long-awaited vacation.  Instead of changing his vacation plans, Cathy can attend the closing and sign the documents on Bill’s behalf.

What if someone does not have a financial POA?  Without a POA, a guardian will likely need appointed for the incapacitated person.  A guardian is appointed by the probate court.  Family members can request to serve as the guardian, but it is ultimately up to the probate judge as to who will serve as the Agent.  Some attorneys serve as guardians.

Being a guardian can be challenging.  The guardian is required to take classes on the duties and obligations of being a guardian.  Also, an annual accounting must be provided to the court showing every dollar of income collected and every dollar spent.  It is much easier on friends and family to name them as the Principal in a POA rather than going through the process of having a guardian appointed by the court.

While financial POAs are relatively simple documents compared to a will or trust, they are nonetheless an important component of an estate plan.  It is best to have the POA drafted by an attorney to be sure the terms and conditions match the goals and objectives of the client.  Any adult who does not currently have a financial POA should get one at their earliest convenience to prevent their family and friends from having to deal with a guardianship.

In the next post we will discuss Health Care Power of Attorneys and Living Wills.

By: Robert Moore, Tuesday, September 13th, 2022

Legal Groundwork

We often think of farm leases in terms of an unrelated landowner leasing to an unrelated tenant.  However, leases can play an important role among related parties.  It is common practice to incorporate long-term leases into an estate plan to help protect the farming heir and help keep the land in the family.  In this article, we will discuss how and when to incorporate long-term leases into an estate plan.

Parents may find themselves in a situation where they would like an off-farm heir to inherit a farm but they also want to keep the land base together for the farming heir. The parents realize that the off-farm heir, upon inheriting the farm, could sell the farm or lease the farm to another farmer.  A long-term lease is one solution to this dilemna.

Consider the following example: Mom and Dad operate a dairy farm and own 500 acres.  They would like Andy, their son, to inherit Greenacre, a 100-acre parcel that sits next to the dairy operation.  Bill, their other son, will continue to operate the dairy operation after Mom and Dad’s death.  Bill must be able to farm Greenacre because it is critical to the dairy operation for corn silage production and for manure application.

This is a common example where the parents want an off-farm heir to inherit a farm but also realize that the farm is critical to the viability of the farm operation’s future.  If Andy inherits Greenacre without any conditions, he could simply sell or lease the farm to a neighbor, possibly causing Bill’s dairy operation to faulter.  Essentially, the ability for Bill to continue farming is contingent upon what Andy does with Greenacre.

A long-term lease may solve Mom and Dad’s dilemma.  Mom and Dad could have Andy inherit Greenacre but require him to lease it back to Andy for a term of years.  This allows Andy to inherit the farm but protects Bill’s land base for his dairy operation.

Using the same example as above:  Mom and Dad establish a trust.  The trust gives Greenacre to Andy but as a condition of him receiving Greenacre he must lease it to Bill for 20 years.  The trust also provides other lease terms including how the lease rate is determined and occasionally updated.

Mom and Dad have now met both goals:  Andy received Greenacre and Bill can continue to use Greenacre for his dairy operation. Bill will pay rent to Andy for the use of Greenacre for the term of the lease.

When using long-term leases, a common question is: how long should the lease be?  Generally, the lease should be long enough to protect the farming heir’s farming career.  This may cause the lease to be 10 years long or perhaps the lease will be 50 years long. 

When using long-term leases, we need to consider the effect on the off-farm heir.  The off-farm heir, in reality, has little control over the land because the lease essentially makes the land unmarketable.  Few people will want to buy a farm that has a 20-year lease on it.  Therefore, the off-farm heir receiving the farm may be disappointed that the only benefit they receive from the land during the term of the lease is a lease payment.  Using the example above, if Andy thought he could immediately sell Greenacre and build his dream house in Florida he is going to be disappointed.  

Using long-term leases to keep the land base together for the farming heir significantly impedes the off-farm heir’s ability to control the land they receive.  However, for many farm families, allowing for a viable farming operation for future generations is of prime importance and limiting the off-farm heir’s ability to control their own farm may be a necessary outcome.  It also may be beneficial for Mom and Dad to inform the off-farm heir that their land will be subject to a lease to avoid disappointment and surprises.

Like all estate planning strategies, long-term leases are another tool in the estate planning toolbox.  For some plans, long-term leases should be kept in the toolbox.  For other plans, long-term leases may be a critical part of the estate plan. The impact on both the farming heir and the non-farming heir is an important factor when considering using long-term leases in a succession plan.  Be sure to consult with an attorney to determine if a long-term lease may be right for you.

Posted In: Estate and Transition Planning
Tags: long-term lease
Comments: 0
By: Robert Moore, Thursday, September 01st, 2022

Legal Groundwork

In prior posts, we discussed Long-Term Care (LTC) costs and the risks that those costs can have on keeping farm assets in the family.  For those people needing LTC, the average cost is around $150,000.  However, some people will require nursing home services for many years which could cause costs to be $500,000 or more.  A strategy some people implement to protect their assets from LTC costs is gifting.  We will discuss both the advantages and disadvantages of gifting.

The idea behind gifting is to transfer the assets to children or other beneficiaries before the assets must be spent on LTC costs.  The person transferring the assets is intentionally trying to make themselves lack the resources to take care of themselves and rely on Medicaid to pay for their care.  This strategy sounds simple, but it has many aspects, both good and bad, that must be considered.

First, Medicaid imposes a penalty for improper transfers.  An improper transfer is any transfer of an asset for less than fair market value.  Medicaid looks back five years for any improper transfers and disqualifies the applicant for one month for each $6,905 of improper gifts made.  Improper transfers prior to the five-year lookback period are not penalized.  

For example, if a gift of $100,000 was made in the last five years, the applicant will be ineligible for Medicaid for 15 months after application.  If a gift of $1,000,000 was made, the applicant will wait five years to apply for Medicaid and then will not be required to report the gift because the five-year penalty period expired.

In addition to overcoming the five-year look back period, making a gift requires the owner to give up all ownership and control, including income produced by the gifted asset.  This creates the risk that the original owner cannot protect the gifted asset from financial or legal mishaps of the person receiving the gift.  This risk is a significant factor that should be considered when contemplating a gift.

Consider the following example.  Dad owns 200 acres of land and is concerned he will be forced to sell the land if he incurs LTC costs.  To protect the land, Dad gifts the land to Daughter.  After Daughter receives the land, she causes an automobile accident and is liable to the injured party for $1,000,000.  Her auto insurance only covers $250,000 in liability so she must sell some of the land received from Dad to pay the injured party. 

This example illustrates the risk of giving up ownership and control of assets when gifting.  In future articles we will discuss strategies to overcome this risk using irrevocable trusts and/or LLCs.

Tax implications are another factor to consider when gifting.   The IRS allows large gifts to be made without a gift tax being owed provided a gift tax return is filed.  Instead of taxing the gift, the IRS reduces the giftor’s federal estate tax exemption by the value of the gift which is reported on the gift tax return.  Also, the person receiving the gift receives the same tax basis as the giftor rather than receiving a stepped-up tax basis to fair market value if they were to receive the same asset as an inheritance. 

Using the same example as above, the value of the land gifted to Daughter was $2,000,000.  Dad would file a gift tax return and his federal estate tax exemption would be reduced from $12,060,000 to $10,060,000.  No tax is owed but Dad’s estate exemption limit is reduced by the amount of the gift.  Let’s assume Dad paid $200,000 for the farm when he first bought it.  Daughter will receive the farm with a $200,000 tax basis.  If she would have inherited the farm instead, she would have received the farm with a $2,000,000 tax basis.  The loss of stepped-up tax basis when gifting is a significant factor to consider.

For a thorough discussion on the tax implications of gifting, see the law bulletin “Gifting Assets Prior to Death” at go.osu.edu/farmplanning.

The biggest benefit of a gifting strategy is its simplicity. Land can be transferred with a simple deed, money can be transferred by check,  and machinery and livestock can be transferred with simple paperwork.  It is usually relatively easy to transfer assets by gift.  Also, the gifting can be done quickly to get the five-year lookback period started.

Gifting assets is one of several strategies to protect assets from LTC costs.  While the process of gifting is relatively easy, the implications of gifting are significant and extensive.  Anyone considering a gifting strategy to protect assets should consult their legal and tax advisors to determine if gifting is the best strategy.

 

By: Robert Moore, Friday, August 26th, 2022

Legal Groundwork

In a prior blog post, we discussed whether a will or trust might be needed for an estate plan.  Another common question is: what is an irrevocable trust and do I need one?  Irrevocable trusts have their place in estate planning but not everyone needs one nor should everyone have one.

Most trusts are revocable trusts.  These types of trusts can be amended or revoked by the grantor (creator) any time until the time of death.  Additionally, assets can be transferred into and out of the trust at will by the grantor.  In essence, a revocable trust is one and the same as the grantor until the grantor passes away. 

An irrevocable trust is what its name implies – once established, it cannot be changed except for a few notable exceptions.  There are different kinds of irrevocable trusts but the most common is used to protect assets from nursing home costs and/or creditors.  For this article, we will focus on an irrevocable trust to protect assets from nursing home costs.

The idea of the irrevocable trust is to transfer the assets to be protected into the trust.  After transferring the assets to the trust, the original owner has no further ownership or control of the asset.  The owner has also given up all rights to receive the assets back from the trust. Because the original owner cannot have access to the protected assets, neither can a nursing home or creditor.  Note: assets are not protected from a nursing home until five years after the date of the transfer.

When the trust is established by the original owner, they will name a trustee for the trust.  The trustee has the legal duty to manage and oversee the trust and trust assets.  The trustee must follow the terms of the trust but otherwise has no duty to the original owner.  The trustee can be anyone other than the original owner.  The trustee is often a child or children of the owner.

The trust can be set up with specific requirements.  For example, the original owner may state that the trustee does not have authority to sell any farmland held by the trust.  The trustee must follow the directives of the irrevocable trust.  Also, the irrevocable trust will act just like a revocable trust at the original owner’s death.  That is, the same distribution plan provisions that might be included in a revocable trust and can be included in an irrevocable trust.

Let’s look at an example to help explain how an irrevocable trust works:

Mom and Dad own 300 acres of farmland that has been in the family for many generations.  They also own some retirement accounts and investments.  They are concerned that if one or both go into a nursing home, they may run out of money and be forced to sell land to pay for their care.

Mom and Dad establish an irrevocable trust and transfer the 300 acres into the trust.  They name Son and Daughter as co-trustees of the trust.  The trust terms include a provision that the land cannot be sold while Mom and Dad are alive.  At Mom and Dad’s death, the trust requires the Smith Farm to go to Son and the Jones Farm to go to Daughter with a right of first refusal to each other.

Ten years after they set up the irrevocable trust, Mom and Dad go into a nursing home.  After being in the nursing home for a few months, they run out of money to pay for their nursing home care.  The nursing home cannot foreclose on the land to be paid.  Mom and Dad do not own the land and the 5-year penalty period has expired.  Because Mom and Dad own no assets, they will likely be eligible for Medicaid assistance for their nursing home care.

Upon Mom and Dad’s death, the trust’s distribution plan will cause the Smith Farm to go to Son and the Jones Farm to go to daughter with the right of first refusal.

As the example shows, an irrevocable trust can protect assets against nursing home costs and creditors.  It can also act as part of the estate plan by including distribution provisions for the heirs and beneficiaries upon death.

The biggest disadvantage of an irrevocable trust is that it cannot be undone.  Upon the assets being transferred into the irrevocable trust, they will never be owned by the original owner again.  Deciding upon an irrevocable trust requires the owners to give up full ownership and control of the assets.  This can be a difficult decision for the owner, especially for farmers giving up ownership of their land.

The best candidates for irrevocable trusts are typically older, retired farmers who no longer need their land for collateral to buy other land or assets.  For farmers who are still actively farming and may need their land for collateral, an irrevocable trust may hinder the growth of their farming operation.  Before establishing an irrevocable trust, be sure to talk to an attorney about the advantages and disadvantages of an irrevocable trust to determine if it is the best strategy for you.

Planning for the Future of Your Farm publications
By: Peggy Kirk Hall, Monday, August 08th, 2022

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 ExpectThe 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 AttorneyA 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 DirectivesMedical 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 PlansA 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 ProbateWe 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 DeathGifting 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 PlanningTrusts 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 PlanningMany 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 EquitablyWhether 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 LivestockEquipment 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.

NAL NALC

 

By: Robert Moore, Thursday, July 28th, 2022

Legal Groundwork

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.

By: Robert Moore, Thursday, July 14th, 2022

Legal Groundwork

 

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.

Posted In: Estate and Transition Planning
Tags: Long Term Care
Comments: 0
Webinar announcement with picture of elderly couple walking on a farm.
By: Peggy Kirk Hall, Friday, July 08th, 2022

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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