Estate Planning

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.

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/.

 

NALC and USDA logos

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

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.

Farmer holding clipboard with tractor in background and Legal Groundwork Series title

By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program

There is no doubt that Long-Term Care (LTC) costs are a financial threat to many farms.  Some farmers go to great lengths to protect their farm assets from potential LTC costs.  Protection strategies include gifting assets to family members, transferring farm assets to irrevocable trusts and buying LTC insurance.  But what do the statistics say about the actual risk to farms for LTC costs?

According to the Administration for Community Living, someone turning age 65 today has an almost 70% chance of needing some type of long-term care services in their remaining years.  Due to women having longer life expectancies, predictions are that women will need an average of 3.7 years of care and men will need 2.2 years.  While one-third of today's 65-year-olds may never need long-term care support, 20% will need it for longer than 5 years.  The following data from the ACL provides more details as to the type and length of care needed:

This table shows that of the three years of LTC needed on average, two of those years are expected to be provided at home and one year in a facility.  It is noteworthy that a majority of LTC services are typically provided at home because most people do not want to leave home for a facility, some at-home care isn’t paid for, and home care is less expensive than facility care.  Many people may think all LTC will be provided in a facility, but as the data shows, this is not usually the case.

The next important statistic is cost.  The following are costs of various LTC services from the 2021 Cost of Care Survey provided by Genworth Financial, Inc. 

Nursing home costs are significantly higher than in-home services.  People may think of LTC costs in terms of nursing homes, but as discussed in the previous paragraph, the majority of LTC services are the less expensive, in-home type. So, while all LTC costs are significant, they might not be as high as commonly thought.

Let’s use this data to come up with some possible numbers for an Ohio farmer.  Assume the following:

  • A 65year-old farmer has a 67% chance of needing LTC
  • The length of that care will be around 3 years
  • 1 year of care will be unpaid inhome services
  • 1 year of care will be paid, inhome services at around $60,000/year
  • 1 year of care will be in a nursing home at around $90,000/year

Based on the above assumptions, a 65-year-old Ohioan, on average, can expect about $100,000 in LTC care costs ($60,000 + $90,000 x 67%). Keep in mind that these costs are per person and a married couple will have double these potential costs. The next question is, can the average farmer absorb LTC costs without jeopardizing the farm?  That's a question we'll examine in a future post in the Legal Groundwork Series.

 

Farmer holding clipboard with tractor in background and Legal Groundwork Series title

By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program

Most farmers do a great job of managing their taxable income.  They buy inputs or machinery to offset the current year’s income and wait until next year to sell the current crop.  This strategy works well but it catches up to the retiring farmer.  In the year of retirement, a farmer may find themselves with an entire year (or more) of crops or livestock to sell and no expenses to offset the income.  Additionally, machinery and equipment that will no longer be needed for production will need to be sold.  Selling all these assets upon retirement without offsetting expenses can result in tremendous tax liability.

One strategy for retiring farmers to consider is using a Charitable Remainder Trust (CRT).  The CRT is a special kind of trust that can sell assets without triggering tax liability while providing annual income for the retiring farmer.  The CRT essentially spreads out the income from the sale of the assets over many years to keep the farmer in a lower tax rate bracket.  Also, the CRT allows the retiring farmer to make a charitable donation to their charity of choice.

The primary component of a CRT strategy is that a CRT does not pay tax upon the sale of assets.  Due to its charitable nature, a CRT can sell assets and pay no capital gains tax nor depreciation recapture tax.  The retiring farmer establishes a CRT then transfers the assets they want to sell into the CRT.  The CRT then sells the assets.  For the strategy to work, the trust must be a CRT.  A non-charitable trust will owe taxes upon the sale of the assets.

The proceeds from the sale of the assets are then invested in a financial account.  The farmer works with an investment advisor to determine the desired annual income needed from the proceeds and then an appropriate investment portfolio is created.  It is important to note that income calculations must include leaving at least 10% of the principal to a charity.  The farmer may not receive all the income or the trust will not qualify as a charitable trust.  The term of the payments from the investment portfolio cannot exceed 20 years.

After the financial account is established, the farmer will receive annual income.  This income is taxed at the farmer’s individual tax rate.  By paying the sale proceeds out over a number of years, the farmer’s income tax bracket can be moderated.  Selling all assets in one year would likely cause the farmer to be pushed into the highest income tax and capital gains tax bracket, so spreading out the income keeps the farmer in a lower tax bracket.

Another important component of a CRT is the charitable giving requirement.  As stated above, the farmer must plan to give 10% of the principal to a charity.  The funds are provided to the charity when the term of the investment expires or when the farmer dies.  Depending on the performance of the investment, the charity may receive more than 10% or less than 10%.  The farmer must be able to show that when the investment account was established, the intention was for the charity to receive at least 10% of the original principal.

Consider the following examples, one with a CRT and one without.

Scenario without CRT.  Farmer decided to retire after the 2021 crop year.  Farmer owned $800,000 of machinery and $200,000 of grain.  Farmer sold all the grain and machinery before the end of 2021.  Farmer owed tax on $100,000 of ordinary income due to depreciation recapture on the machinery and sale proceeds of the grain.  Farmer’s tax liability was $450,000 for the sale of the assets.

Scenario with CRT.  Farmer established a CRT and transfered the machinery and grain into the CRT.  The CRT sold the machinery and grain but did not pay tax on the sale proceeds due to its charitable status.  Farmer established an annuity to pay out over 20 years.  Each year Farmer receives $65,000 of income from the CRT.  Farmer pays income tax on the payment but at a much lower rate than the previous scenario.  At the end of the 20-year term, a charity receives $150,000 (original 10% of principal plus interest).

As the scenarios show, A CRT can save significant taxes for the retiring farmer. Also, a CRT allows a retiring farmer to make a charitable contribution to their charity of choice.

A retirement strategy using a CRT is not without its disadvantages.  One disadvantage is the cost to implement the plan.  A CRT plan is complicated and requires the assistance of an attorney, accountant, and financial advisor.  The combined professional fees could be $25,000 or more.  Another disadvantage is the inflexible nature of the plan.  The CRT is an irrevocable trust; once the CRT is implemented the plan cannot be changed.  If the retired farmer finds they need more income than allocated from the CRT, they are unable to make such a change.

Anyone considering retiring from farming should explore the possibility of incorporating a CRT into their plan.  CRTs can save significant income taxes and provide for charitable giving, but it’s not for everyone.  The potential tax savings must be enough to justify the significant costs to establish the CRT and the farmer must be willing to give up control of the sale proceeds.  Retiring farmers should consult with their attorney, accountant and/or financial advisor to assess how a CRT might fit into their retirement plan.

 

Farmer holding clipboard and title of "Legal Groundwork Series, legal planning for the future of your farm"

By Robert Moore, Attorney and Research Specialist, Agricultural & Resource Law Program

Anyone who has ever been an Executor of an estate knows how much paperwork is involved with administering an estate.  The county probate court, which oversees the estate process, requires many filings to verify the assets the deceased person owned, determine the value of those estates and to ensure that the correct beneficiaries receive the assets.  Typically, administering an estate requires the assistance of an attorney familiar with probate rules and forms.

Like any professional providing services, attorneys will expect to be paid for their estate administration services.  Legal fees charged by an attorney for an estate must be approved by the probate court.  Many probate courts have established a schedule of fees that provides a benchmark for attorneys.  Basically, if the attorney’s legal fees are no more than the schedule of fees, the court will approve the fees.  The approved probate fees vary from county to county but are usually between 1% to 6% of the value of the estate. 

It is important to note that the court approved probate fees are a benchmark, not a requirement.  That is, the court is not requiring an attorney to charge those rates.  Instead, the court is merely stating that fees that do not exceed the benchmark will likely be approved.  It is up to each attorney to determine the fee structure to implement for their services.  Some attorneys may use the probate rates for fees while other attorneys may bill based on an hourly basis.

Before hiring an attorney, Executors should have a thorough discussion regarding the attorney’s fee structure.  The Executor should ask if the attorney charges on an hourly basis, flat rate basis or uses the county probate rates.  Based on the fee structure used, the attorney should be able to provide a good estimate of legal costs for the estate administration.  If the Executor has reason to believe the fees charged by the attorney may be too high, it’s helpful to consult with other attorneys who use a different fee structure and compare. 

Consider the following examples:

  • The county probate court allows a 2% legal fee rate for real estate that is not sold.  Joe passes away owning a $100,000 house.  Joe’s Will directs the house to be inherited by his daughter.  The attorney assisting with the estate administration uses fees based on the county rate.  The attorney will be entitled to $2,000 in legal fees.
  • Let’s change the scenario so that Joe owned a $1,000,000 farm when he passed away.  The attorney will be entitled to $20,000 in legal fees.

The above examples illustrate how probate rates work and also illustrates why executors should not automatically agree to pay the probate rates.  In the examples, the attorney basically does the same work – transfers one parcel of real estate to the daughter.  However, because the farm was worth ten times more in value, the attorney received ten times more in legal fees.

Let’s continue the scenario. 

  • The Executor thinks $20,000 in legal fees to transfer the farm may be too much.  The executor finds an attorney that charges hourly for estate administration, rather than using the county rates.  The attorney charges $200/hour and thinks it will take about 15 hours of work to have the farm transferred to Joe’s daughter.  Executor quickly decides to hire the second attorney and saves $17,000 in legal fees.

Often, probate rates can result in reasonable legal fees.  Charging $2,000 to transfer a $100,000 house is probably reasonable.  In some situations, particularly for smaller estates, the probate rates may be inadequate, and the attorney may seek permission from the court to charge in excess of the rates.  However, for farm estates, the county rates can result in excessive legal fees.  Due to the capital-intensive nature of farming, farm estates will tend to have a much higher value than typical, non-farm estates.  A modest farm estate of $5 million, at a 2% probate fee rate, will result in $100,000 of legal fees.  An attorney charging $250/hour would have to bill 400 hours to make those same legal fees.  A $5 million farm estate is not going to take 400 hours to administer.

Executors administering farm estates should carefully evaluate legal fees charged by the estate attorney.  Applying county probate rates to farm estates can result in very large legal fees.  Before agreeing to accept the probate rates as the fee structure, Executors should also inquire as to what legal fees would be if charged on an hourly basis.  After getting an estimate of legal fees for both fee structures, the Executor can then make an informed decision as to how best to proceed with legal counsel.

Picture of Ohio farmland at sunset
By: Peggy Kirk Hall, Thursday, March 10th, 2022

In farm estate and transition planning, we caution against leaving farmland to multiple heirs as co-owners on the deed to the property.  That’s because Ohio law allows any co-owner of property to seek “partition,”  a legal action asking the court to either sell the property and divide sale proceeds among the co-owners or, in some cases, to physically divide the property between co-owners.  If the goal of a farm family is to keep property in the family, co-ownership and partition rights put that goal at risk.  A recent case from the Ohio Court of Appeals illustrates how partition can force the unwilling sale of property from a co-owner of the property.

The recent court case didn’t involve farmland, but concerned a home and four acres of land owned jointly by an unmarried couple, each on the deed to the property as co-owners with rights of survivorship.  The couple separated and one remained in the home, but the two could not agree upon how to resolve their interests in the property.  That led to a court case in which one co-owner asked the court to declare that the other had no remaining interest in the property. The other co-owner disagreed and filed a partition claim asking the court to sell the property and divide sale proceeds according to each person’s property interest.  The trial court determined that each co-owner did have ownership interests in the property and ordered the property to be sold according to the partition law.

The trial court granted each party the right to purchase the property within 14 days before it would be sold, but neither exercised that right.  After an appraisal, the court ordered the property sold and also ordered payment of the outstanding mortgage.   That left the court with the challenge of determining how to divide the remaining sale proceeds according to each party’s interests in the property.  A complicated analysis of payments, credit card debts, a home equity loan, rental value, and improvements to the property resulted in a final determination that granted one co-owner more of the proceeds than the other.

Both parties appealed the division of proceeds to the Twelfth District Court of Appeals, unfortunately adding more cost and consternation to resolving the co-ownership problem.  The court of appeals noted that Ohio law grants a court the duty and discretion to apply broad “equitable” principles of fairness when determining how to divide property interests among co-owners in a partition proceeding. A review of the trial court’s division of the proceeds led the appeals court to affirm the lower court’s holding as “equitable,” ending the three-and-a-half-year legal battle. 

Ohio’s partition statute itself provides a warning of the risk of property co-ownership.  It states in R.C. 5307.01 that co-owners of land “may be compelled to make or suffer partition…”  While the purpose of partition is to allow a co-owner to obtain the value of their property interests, it can certainly force others to “suffer.”  If a co-owner can’t buy out another co-owner, the power of partition can force the loss of farm property.  As a result, family land can leave the family and a farming heir can lose land that was part of the farming operation.  That’s most likely not the outcome parents or grandparents expected when they left their farmland to heirs as co-owners.

Fortunately, legal strategies can avoid the risk of partition.  For example, placing the land in an LLC removes partition rights completely, as the land is no longer in a co-ownership situation—the LLC is the single owner of the land.  The heirs could have ownership interests in the LLC instead of in the land, so heirs could still receive benefits from the land.  The LLC Operating Agreement could contain rules about if and how land could be sold out of the LLC, and could ensure terms that would allow other LLC members to buy out another member’s ownership interests.  An agricultural attorney can devise this and other legal strategies to ensure that partition isn’t a risk to farmland or farm heirs.

Read the case of Redding v. Cantrell, 2022-Ohio-567.

Child running on Ohio farmland with sunset in background.
By: Peggy Kirk Hall, Tuesday, January 18th, 2022

Whether it's to protect family farmland, bring future generations into the operation, address special needs like retirement, disability, or remarriage--taking legal steps now can make your goals for the future of your farm a reality.  Farm transition planning is so important to keeping a farm and a farm family together, but it's easy to make mistakes that can bring unintended problems in the future.  Consider this this list of seven common mistakes farmers make in farm transition planning:

1. Procrastination.

2. Thinking joint property titles will do.

3. Overlooking expenses at time of death.

4. Assuming no federal estate taxes.

5. Trying to be fair to all beneficiaries.

6. Failing to consider disability as well as death.

7. Avoiding communication.

We'll discuss and address all of these issues in our "Planning for the Future of Your Farm" workshops this winter.  We can help you get over that procrastination hurdle, develop your goals, deal with communication issues and understand legal strategies.  Join me, attorney Robert Moore, and farm management educator David Marrison for either a day-long live program or a four-part live webinar this winter, where we cover these topics:

  • Developing goals for estate and succession planning
  • Planning for the transition of control
  • Planning for the unexpected
  • Communication and conflict management during farm transfer
  • Legal tools and strategies
  • Developing your team
  • Getting your affairs in order
  • Selecting an attorney

Dates and locations for the workshops are:

  • Live Zoom webinar on January 31 and February 7, 21 and 28 from 6:30--8:30 pm.
    • Because of its virtual nature, parents, children, and grandchildren can easily attend this workshop, regardless of where they live!
  • Day-long in-person workshops:
    • February 10, 2022--OSU Extension Greene County, Xenia, Ohio
    • February 25, 2022--OSU Fisher Auditorium, Wooster, Ohio
    • March 4, 2022--Wood County Fairgrounds, Bowling Green, Ohio

Pre-registration is necessary for all workshops.  For registration and further information, visit this link:  go.osu.edu/farmsuccession.  Together, let's make 2022 the year that you make plans for the future of your farm.

A quill pen laid upon a Last Will and Testament document.
By: Jeffrey K. Lewis, Esq., Wednesday, December 22nd, 2021

Just when you think estate planning can’t get any more complex, we see a court case that proves us wrong.  The case below arises out of a dispute about a devise in a will to a beneficiary that died before the testator.  The central issue was whether Ohio’s anti-lapse statute protected the devise or if the devise lapsed and became part of the testator’s residual estate.  Believe it or not, the answer to that question lies within the word “means.”  Below we discuss the Third District Court of Appeals’ decision and how it reached its conclusion that the word “means” narrows the definition of devise in Ohio’s anti-lapse statute which may create an outcome for families and loved ones that the law or legislature did not intend.   

What it means to “lapse” and Ohio’s anti-lapse statute.  To understand the context and importance of this case, it helps to have a little understanding of Ohio’s common law lapse rule and anti-lapse statute.  Traditionally, at common law, a devise given to a person who predeceases the testator is said to “lapse.”  Devise, as used here, is a general term that is used to mean “the act of giving property by will.” This is an important distinction to make because, as you will learn later, the court had to interpret devise differently under Ohio’s anti-lapse statute.  

If you think about it, it makes sense that a devise would lapse when the beneficiary predeceases the testator because you cannot give property to someone who is already dead.  But under the lapse rule, all surviving heirs of that predeceased beneficiary also lose out on any assets that the beneficiary would have been entitled to.  Instead, the lapsed devise will either become part of the testator’s “residual estate” – where it will be distributed pursuant to the terms of a residuary clause contained within the testator’s will – or it passes through intestate succession.    

The common law rule of lapse has been criticized for the harsh results that it produces.  This is especially true when the lapse rule is applied to wills containing a devise to a child or close relative that predeceases the testator.  For example, Farmer A has no children and wants to give the farm to a family member that will continue the farming operation.  Farmer A’s siblings, however, hope that they get the farmland to sell for a premium price.  Farmer A decides to execute a will that gifts the farm and all associated assets to his nephew who has been helping him on the farm for the past few years.  Farmer A probably hoped or believed that after he was gone, his nephew was going to continue the farming operation and prepare his sons to take over the farm and keep Farmer A’s legacy alive.  However, Farmer A’s nephew was in a horrific tractor accident and passed away shortly after Farmer A executed his will.  Not long thereafter, Farmer A’s health declined, and Farmer A passed away.  In this scenario, the nephew’s sons would not be entitled to the farm because the lapse rule essentially voids the gift to the nephew. Instead the farm is likely to be passed to Farmer A’s siblings and will be sold. 

To remedy the harsh results, Ohio enacted its anti-lapse statute which can be found in Ohio Revised Code Section 2107.52. In the event that a beneficiary dies before the testator, Ohio law “protects” the devise and prevents the devise from being extinguished by the common law lapse rule.       

However, Ohio’s anti-lapse statute only applies in certain situations. First, a devise must be to: 

  • a grandparent; 
  • a descendant of a grandparent (descendants of a grandparent include your siblings, children, parents, aunts, cousins, etc.); or
  • a stepchild of the testator  

If any one of the individuals listed above (also referred to as “devisees”) dies before the testator and leaves surviving descendants, then two situations can occur: 

  1. If the devise is an individual devise (i.e. the devise is not to a group or class of individuals like “my children” or “my grandchildren”) a substitute gift is created in the devisee’s surviving descendants.  The surviving descendants are entitled to the property that the devisee would have been entitled to, had the devisee survived the testator. 
  2. If the devise is in the form of a class gift, a substitute gift is created in the surviving descendants of any deceased devisee. 

Ohio’s anti-lapse statute requires any devise that fails to become part of the testator’s residue or “residual estate.”  If the devise cannot become part of the residue, then it passes by intestate succession.  This overview of Ohio’s anti-lapse statute is very brief and does not cover the many nuances that are contained within the statute.  If you have more questions regarding Ohio’s anti-lapse statute you can visit the statute here or contact a knowledgeable estate planning attorney.  

Case Background.  Now we get to the reason for this post. We will first discuss the background information of the case before diving into the court’s analysis and holding.  In 2019, Theodore Penno passed away leaving a validly executed will which read: 

ITEM II.        I hereby give, devise and bequeath my farm located in Butler Township, Mercer County, Ohio, and any interest that I may have in any farm chattel property to my brother, JOHN PENNO

ITEM III.       All the rest, residue, and remainder of my property, real and personal, of every kind, nature, and description, wheresoever situated, which I may own or have the right to dispose of at the time of my decease, I give, devise, and bequeath equally to my brother, JOHN PENNO and my sister, MARY ANN DILLER, absolutely and in fee simple, share and share alike therein, per stirpes. 

***

ITEM V.        I hereby appoint my niece, LINDA PENNUCCI and my niece, PHYLLIS DILLER, or the survivor of them, as Co-Executors of this my Last Will and Testament.  

John Penno, Theodore’s brother, passed away approximately three years before Theodore. The only sibling to survive Theodore was his sister, Mary Ann Diller.  John is survived by his two children, David Penno and Linda Pennucci.  Mary Ann filed a complaint for declaratory judgment and for construction of Theodore’s will.  Mary Ann argued that Theodore’s gift to John in Item II should lapse because John passed away before Theodore and the farm and farm property should become part of Theodore’s residual estate and be distributed according to the terms of Item III.  John’s children argued to the contrary and asked the court to find that Theodore’s farm and any farm property be distributed to them alone.    

The issue.  The issue in this case was whether the devise to John in Item II lapsed and became part of Theodore’s residual estate.  If the devise did not lapse, then only John’s children would be entitled to the farm and farm property.  If the devise did lapse, then the farm and farm property become part of Theodore’s residual estate and is then distributed according to the terms of Item III, which would entitle Mary Ann to some portion of the farm and farm property.  The probate court and the trial court found that the devise in Item II did not lapse, and John’s children were entitled to the farm and farm property alone.  Mary Ann then filed her appeal to the Third District Court of Appeals.  

The court’s interpretation of “devise” in Ohio’s anti-lapse statute.  At the center of this case is the definition of “devise” contained within Ohio’s anti-lapse statute.  The statute provides that: 

“Devise" means an alternative devise, a devise in the form of a class gift, or an exercise of a power of appointment.  

The word "means" is bolded and underlined here because it becomes very important to the court’s interpretation of the statute.  

Like the court, Mary Ann and her daughter, Phyllis, also thought the word “means” was very important.  They argued that the gift of Theodore’s farm and farm chattel in Item II was not a “devise” under Ohio’s anti-lapse statute and therefore, the gift to John lapsed when John predeceased Theodore.   Mary Ann and Phyllis reasoned that Theodore’s devise to John was a primary devise and Ohio’s anti-lapse statute only protects an alternative devise, a devise in the form of a class gift, or an exercise of a power of appointment.  The court eventually agreed with Mary Ann and Phyllis.  

The court explained the difference between a primary devise and the other meanings of devise contained within Ohio’s anti-lapse statute.  According to the court, the different definitions are as follows: 

  • Primary devise – “is a devise to the first person named as taker.”
  • Alternative devise – “is a devise that, under the terms of the will, is designed to displace another devise if one or more specified events occur.”
  • Class gift – “is a gift to a group of persons, uncertain in number at the time of the gift but to be ascertained at a future time, who are all to take in definite proportions, the share of each being dependent on the ultimate number in the group.”
  • Power of appointment – “is a power created or reserved by a person having property subject to disposition, enabling the donee of the power to designate transferees of the property or shares in which it will be received; esp., a power conferred on a donee by will * * * to select and determine one or more recipients of the donor’s estate.” 

The court examined the definition of “devise” as written in the statute and concluded that the definition only meant alternative devise, class gift, or power of appointment.  The court reasoned that the use of the word “means” conveys that the definition of “devise” in Ohio’s anti-lapse statute is intended to be an exhaustive definition and that the three kinds of testamentary gifts following the word “means” are the only kinds of testamentary gifts capable of qualifying as “devises.”  To help reinforce their conclusion, the court compared the word “means” to the word “includes” and concluded that “means” indicates that there is only one meaning whereas “includes” conveys the idea that there are other items that can be included in the definition of a word, even though they are not specifically stated.

Based on the court’s findings and conclusions, the court ruled that Theodore’s gift to John was a primary devise and was not protected by Ohio’s anti-lapse statute.  The court found that the gift to John must become part of Theodore’s residual estate or pass through intestate succession.  

The court’s ruling may seem counterintuitive to the purpose of the anti-lapse statute, and the court admitted as much. But the court reiterated the concept that it is not the court’s place to change the meaning of a statute as it is written – that obligation is left to the legislature and the legislature alone.  The court argued that if the court’s ruling is an unintended consequence resulting from how the statute is written, the legislature can change the words of the law to more accurately reflect the purpose of the anti-lapse statute.   

Conclusion.  This case demonstrates how one simple word can drastically change the meaning of the law and how that small word can affect a lot of people.  This case is also a great reminder about the importance of planning for all possible scenarios.  Many times, when we create our own estate plan, we must face the reality of our own deaths.  Facing that reality is quite uncomfortable.  But we must also come to terms with the even more uncomfortable possibility that our loved ones pass away before us.  This is why it is important to speak with an experienced and knowledgeable estate planning attorney as you plan for the future.  A good attorney will address not only the immediate needs you have for transferring your assets but will also help you plan for all possibilities so that your intentions are carried out.  

This case is also a good example of why we should update our estate plans when major life events occur.  The death of a beneficiary is definitely one of those instances where you should contact your attorney to update your estate plan so that there is no doubt your loved ones are taken care of when you are gone. 

To read the court’s decision, please visit the Ohio Supreme Court’s website.  

Peregrine Falcon flying straight at camera.
By: Jeffrey K. Lewis, Esq., Friday, October 15th, 2021

Did you know that the fastest animal in the world is the Peregrine Falcon?  This speedy raptor has been clocked going 242 mph when diving.

Like the Peregrine Falcon, this week’s Ag Law Harvest dives into supply chain solutions, new laws to help reduce a state’s carbon footprint, and federal and state case law demonstrating how important it is to be clear when drafting legislation and/or documents, because any ounce of ambiguity could lead to a dispute.      

Reinforcing the links in the supply chain.  President Joe Biden announced that ports, dockworkers, railroads, trucking companies, labor unions, and retailers are all coming together and have agreed to do their part to help reduce the supply chain disruption that has left over 70 cargo ships floating out at sea with nowhere to go.  In his announcement, President Biden disclosed that the Port of Los Angeles, the largest shipping port in the United States, has committed to expanding its hours so that it can operate 24/7; labor unions have announced that its workers have agreed to work the additional hours; large companies like Walmart, UPS, FedEx, Samsung, Home Depot and Target have all agreed to expand their hours to help move product across the country.  According to the White House, this expanded effort will help deliver an extra 3,500 shipping containers per week.  Port and manufacturing disruptions have plagued retailers and consumers since the beginning of the COVID-19 pandemic.  Farming equipment and parts to repair farming equipment are increasingly in short supply.  The White House hopes that through these agreements, retailers and consumers can finally start to see some relief.  

California breaking up with gas powered lawn equipment.  California Governor Gavin Newsom recently signed a new bill into law that would phase out the use of gas-powered lawn equipment in California.  Assembly Bill 1346 requires that new small off-road engines (“SOREs”), used primarily in lawn and garden equipment, be zero-emission by 2024.  The California legislation seeks to regulate the emissions from SOREs which have not been as regulated as the emissions from other engines.  According to the legislation, “one hour of operation of a commercial leaf blower can emit as much [reactive organic gases] plus [oxides of nitrogen] as driving 1,100 miles in a new passenger vehicle.”  The new law requires the State Air Resources Board to adopt cost-effective and technologically feasible regulations to prohibit engine exhaust and emissions from new SOREs.  Assembly Bill 1346 is a piece of the puzzle to help California achieve zero-emissions from off-road equipment by 2035, as ordered by Governor Newsome in Executive Order N-79-20

U.S. Supreme Court asked to review E15 Vacatur.  A biofuel advocacy group, Growth Energy, filed a petition asking the U.S. Supreme Court to review a federal court’s decision to abolish the U.S. Environmental Protection Agency’s (“EPA”) rule allowing for the year-round sale of fuel blends containing gasoline and 15% ethanol (“E15”).  Growth Energy argues that the ethanol waiver under the Clean Air Act for the sale of ethanol blend gasoline applies to E15, the same as it does for gas that contains 10% ethanol (“E10”).  Growth Energy also claims that limiting the ethanol waiver to E10 gasolines contradicts Congress’s intent for enacting the ethanol waiver because E15 better achieves the economic and environmental goals that Congress had in mind when it drafted the ethanol waiver.  Growth Energy asks the Supreme Court to overturn the lower court’s decision and instead interpret the ethanol waiver as setting a floor, not a maximum, for fuel blends containing ethanol that can qualify for the ethanol waiver.  Growth Energy now awaits the Supreme Court’s decision on whether or not it will take up the case. Visit our recent blog post for more background information on E15 and the waivers at issue.  

When in doubt, trust the trust.  A farm family in Preble County may finally be able to find some closure after the 12th District Court of Appeals affirmed the Preble County Court of Common Pleas’ decision to prevent a co-trustee from selling farm property.  Dorothy Wisehart (“Dorothy”), the matriarch of the Wisehart family established the Dorothy R. Wisehart Trust (the “Trust”) in which she conveyed a one-half interest in two separate farm properties, both located within Preble County to the Trust.  Dorothy retained her one-half interest in the two farms which passed to her son, Arthur, upon her death.  Furthermore, upon Dorothy’s death, the Trust became an irrevocable trust with Arthur as the sole trustee.  The Trust had five income beneficiaries – Arthur’s wife and four kids.  The Trust specifically allowed for removal and replacement of the trustee upon the written request of 75% of the income beneficiaries.  In 2010, four of the five income beneficiaries executed a document removing Arthur as the sole trustee and instead placed Arthur and Dodson, Arthur’s son and one of the income beneficiaries, as co-trustees.  Arthur, however, argued that only Dorothy had the power to remove and appoint a new trustee and once Dorothy passed, no new trustee could be appointed.  In 2015, Dodson filed suit against his father after Arthur allegedly tried to sell the two farms and further alleged that Arthur breached his fiduciary duty by withholding funds from the Trust.  Dodson also asked the court to determine the issue of whether Dodson was validly appointed as co-trustee.  The common pleas court sided with Dodson and found that (1) the Trust held an undivided one-half interest in the farms, (2) Dodson was validly appointed as co-trustee, and (3) Arthur wrongfully withheld funds from the Trust, breaching his fiduciary duty as a trustee.  Arthur appealed, arguing that the case was not “justiciable” because the harms alleged by Dodson were hypothetical and no real harm occurred.  However, the 12th District Court of Appeals disagreed with Arthur.  The court found that the Trust expressly provided for the removal and appointment of trustees by 75% of the income beneficiaries.  Further, the court ruled that this case was justiciable because Dodson’s allegations needed to be resolved by the courts or else real harm would have occurred to the income beneficiaries of the Trust.  This case highlights perfectly the importance of having well drafted estate planning documents to help clear up any disputes that may arise once you’re gone.  

No need to cut the “GRAS” today.  Consumer advocates, Center for Food Safety (“CFS”) and Environmental Defense Fund (“EDF”), brought suit against the Food and Drug Administration (“FDA”) asking the court to overturn the FDA’s rule regarding “Substances Generally Recognized as Safe (the “GRAS Rule”).  According to the plaintiffs, the GRAS Rule subdelegated the FDA’s duty to ensure food safety in violation of the United States Constitution, the Administrative Procedure Act (“APA”), and the Federal Food, Drug, and Cosmetic Act (“FDCA”).  In 1958, Congress enacted the Food Additives Amendment to the FDCA which mandates that any food additive must be approved by the FDA.  However, the definition of “food additive” does not include those substances that are generally recognized as safe.  Things like vinegar, vegetable oil, baking powder and many other spices and flavors are generally recognized as safe to use in food and not considered to be a food additive.  Under the GRAS Rule, anyone may voluntarily, but is not required to, notify the FDA of their view that a substance is a GRAS substance.  There are specific guidelines and information that must be presented to back up a manufacturer’s claim that a substance is GRAS.  In any case, the FDA retains the authority to issue warnings to manufacturers and to stop distribution when the FDA believes that a substance is not a GRAS substance.  Plaintiffs claim that under the GRAS Rule, the FDA is subdelegating its duty by allowing manufacturers to voluntarily notify the FDA of a GRAS substance rather than requiring it.  However, the Federal District Court for the Southern District of New York found that the FDA did not subdelegate its duties because the FDCA does not require the FDA provide prior authorization that a substance is GRAS.  Further, the court held that the FDA has done nothing more than implement a process by which manufacturers can notify the FDA of GRAS determinations and the FDA can choose to agree or disagree.  The court reasoned that even if a mandatory GRAS notification procedure or prior approval process were in place, manufacturers could simply lie about what’s in their products and the FDA would be none the wiser.  The court also noted that mandatory submissions would consume the FDA’s resources which would be better spent evaluating higher priority substances.  The court ultimately concluded that the FDA’s GRAS Rule does not highlight a constitutional issue, nor does it violate the FDCA or APA.

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