Have you ever sent an email or text message that seemed perfectly clear to you, but the recipient read it differently than you had intended? It happens all the time in everyday life. We know what we mean in our head, but the message we send contains ambiguities. While we can hopefully fix ambiguities in an email or text message quickly, wills can present a different story.
Once a person has passed away, fixing an ambiguity in a will is not easy because the best person to ask about intent cannot be called to testify. Unfortunately, many families learn about the problems posed by ambiguities the hard way.
Take a recent example from Mahoning County. In April, an Ohio appellate court upheld a probate court’s decision on how to distribute the assets of a Salem area farmer (“the farmer”). This happened five years after the farmer passed away, and after two appeals of his estate. He had a will, but it contained an ambiguity that resulted in years of litigation and delayed closure.
His will made one specific bequest, and the rest of his property would go into a general pot for his named beneficiaries to divide among themselves as they or the executor saw fit. The specific bequest read, “I give, devise, and bequeath to my brother […], the real estate at […] together with all contents of said real estate, if owned by me at the time of my death.” The court had no problem with the real estate because the will provided an address; however, what did the will mean by “all contents of said real estate”?
At the time of the farmer’s death, the real estate contained a residence, family heirlooms, valuables, household goods, farm equipment, and vehicles. The brother argued that the specific bequest included farm equipment and vehicles because of their physical presence on the real estate. The general beneficiaries disagreed, believing that the bequest applied to pieces of personal property like heirlooms within the house. Looking only at the will, the probate court agreed with the general beneficiaries. The brother appealed the decision.
The appellate court viewed “all contents of said real estate” as ambiguous, and sent the case back to the probate court to re-examine the will. The law generally disfavors testimony about what a decedent intended because the law assumes that the will provides the best evidence of what the decedent wanted. When a court finds an ambiguity in a will, it may consider evidence beyond the will, such as testimony or other documents; however, the law considers this evidence less authoritative because it is not directly from the decedent.
After the first appeal, the brother and attorney who drafted the farmer’s will testified in probate court about conversations with the farmer before he passed away. The brother claimed that conversations with his brother about ideas to grow the farm meant that the farm equipment should go to him; however, the attorney claimed that the farmer intended only for the brother to receive family heirlooms within the house. The court believed the farmer’s attorney, and again decided that the specific bequest did not include the equipment.
For a second time, the brother appealed the probate court’s decision. This time the appellate court was satisfied with the probate court’s actions and upheld the probate court’s interpretation of the will. Click HERE to read the court’s opinion, which is cited as Bogar v. Baker, 2019-Ohio-1762 (7th Dist.).
It took the family in the Bogar case five years to have a legal determination of what their loved one meant in his will. One clause resulted in lots of costly litigation, not to mention the stresses on the family.
No family wants a contentious probate. Losing a loved one is hard enough without having to go to court to fully litigate the contents of a will. Fortunately, this is a problem that can be avoided, or at least minimized, with an effective plan.
Here are some tips to minimize ambiguities in your will:
- Identify who you want to have specific pieces of your real and personal property. For personal items such as family heirlooms, antiques, and art, you may leave a directive that names specifically which person receives what items.
- Read through your will. Does it make sense to you? Does it sound like what you want to happen?
- Consider showing your will to your executor and ask what he or she thinks your will says. How would the executor carry out your will if you were gone today? If he or she says something that you did not intend, you can still fix your will to more clearly align it with your wishes.
- If you are concerned about beneficiaries challenging your will, you can include a no-contest clause that gives the executor final authority to interpret how to distribute your estate and penalize beneficiaries who challenge that distribution. When included in a will, these clauses often prevent a beneficiary who challenges a will from receiving any property from the estate.
These tips do not guarantee a challenge-free probate process, but can help make your will as clear as possible. If a question about your intent would still arise, having a couple of witnesses who can attest to your wishes will help the court get as close to your wishes as possible. However, this requires you to tell each of these people the same thing and in a clear manner. If you make any changes, you need to communicate that to your confidants.
Stay tuned in the next couple of months for new resources from our team about estate and business transition planning. Until then, take a moment to review your estate plan!
Sometimes you happen upon a question that you want an answer to, and the answer you find raises more questions. That’s exactly what happened when we started examining Limited Liability Company (LLC) statutes from across the Midwest.
Originally, we wanted to determine whether there are any significant legal differences between the LLC statutes of different states. While we may be based in Ohio, we find projects that examine how different states compare to one another on the same legal topic fascinating. The comparisons allow us to see trends and different ideas, and we had the chance to do this in our recently completed projects on CAUV and agritourism.
Ultimately we found the Midwestern states to have functionally similar LLC statutes, with about half of the Midwest having adopted a uniform statute. When a state adopts a uniform statute, it intends for its law on a given topic to match those of other states with the same uniform statute. There are other examples of these like the Uniform Commercial Code, Uniform Probate Code, and more. Uniform codes are designed to make it easier for people to do business and live their lives across state lines. For Midwestern LLC statutes, even in states that have not adopted a uniform statute, the key elements are still very similar. The statutes have filing procedures for creating the entity, default rules for operating agreements, and rules that govern LLCs in general.
When we answered our questions about the state statutes, we became curious about some of the benefits offered by using an LLC instead of some other business form. We found that LLCs offer great liability protection, with some specific limitations such as the application of piercing the veil from corporate law. Further, pass through taxation can provide great tax benefits and avoid double taxation. Since states allow operating agreements to be highly customizable, LLCs also provide a flexible entity structure that may be adapted to suit the needs of a business or family.
That last word led us to another question: what benefits does the LLC structure offer a family farm in its estate and business transition plan? The previous three benefits are well known and thoroughly discussed; however, this last one, while done a lot in practice, is not commonly mentioned in academic writing. Ultimately, the benefits in estate and transition planning come from the flexible nature of the operating agreement.
How can LLCs be helpful in an estate and business transition plan for a farm? Here’s a few ways:
- Restrict the transfer of an ownership interest through rights of first refusal and buy-out provisions
- Restrict membership and voting power of non-family members
- Transition equity ownership more easily than in a corporation
- Transition the business in relative privacy
Once we learned about these benefits, the question arose of how common farming LLCs now are. Using data from the USDA’s Census of Agriculture, we found that by 2012, there were almost as many farms organized as LLCs as there were farms organized as corporations, while the vast majority of farms remained owned outright by individuals with no formal legal entity. We are waiting for the next Census of Agriculture to spot any trends, because 2012 was the first year that farms were asked to identify whether they were organized as LLCs.
Throughout the paper, we made some observations and predictions for what we expect to see in the future. We are also history buffs, so of course there had to be a section on the origins of the LLC, and why Wyoming was the first state to adopt an LLC statute. It is an interesting and dramatic history that we had not heard about before.
Our project examining farm LLCs is available on our OSU Extension Farm Office website HERE, as well as the National Agricultural Law Center’s website HERE. This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.
The holiday season stands out as one of the most generous times of year as people give gifts to the people they love. What better way to get into the holiday spirit than to talk about the tax implications of your gifts? There are three shopping weekends left until December 25th, so here are three highlights about the federal gift tax that you should know:
1. The federal gift tax is assessed on the person who gives the gift, not the person who receives the gift.
An individual who gives a gift of cash or assets with a fair market value greater than $15,000 to any one person in a given year will have to report the gift(s) using IRS Form 709 when filing taxes for that year. These forms cannot be filed jointly, so if a married couple gives a gift that is worth more than $30,000 to any one person, both of them must file IRS Form 709 and report half of the value of the gift.
Form 709 requires a few pieces of information about the gift and who receives the gift. It asks for things like a description of the gift, the recipient’s name and address, when it was given, and its value. While documentation or receipts do not have to be submitted with Form 709, filers should keep records for themselves about the gift in case the IRS has questions.
The gift tax rates for 2018 range from 18 to 40 percent. The rates depend upon how much in excess of the $15,000 exclusion the gift is valued. For instance, a gift valued at $20,000 would have no taxes on the first $15,000, but the $5,000 over the $15,000 threshold would be subject to an 18 percent tax. The 40 percent rate applies to gifts valued at $1,015,000, or $1,000,000 over the $15,000 exclusion.
Fortunately for the recipient, the gift does not count as income to the recipient because the gift falls under the gift tax rules instead of the income tax rules.
2. Each individual may give up to $15,000 in gifts to any person per year free of federal gift taxes. Because this rule focuses on the individual giver, a married couple could give up to a combined $30,000 in gifts to any one person tax free.
To illustrate, if Bob and Betty Buckeye have a daughter, Bernice, both Bob and Betty can give Bernice $15,000 worth of gifts in 2018, for a total of $30,000, without having to pay taxes on the gift. If Bernice is married to Brutus, then Bob and Betty could also give a combined $30,000 gift to Brutus; however, that money is Brutus’s. The gift to Brutus cannot be used to hide a gift to Bernice.
Importantly, some gifts are excluded from the gift tax and do not count toward the $15,000 exclusion threshold. These include gifts to a spouse, gifts of tuition paid directly to the college or institution, gifts of medical expenses, gifts to certain exempt organizations like charities, and gifts to certain political organizations.
However, things like forgiving a debt, contributing to a 529 education plan, making an interest-free or below market rate loan, transferring the benefits of an insurance policy, or giving up an annuity in exchange for the creation of a survivor annuity do count as gifts. When these gifts exceed the $15,000 exclusion threshold, they are taxable.
The $15,000 threshold is new for 2018. In 2017, it was only $14,000. The IRS now revises the amount based upon inflation, but is expected only to do so periodically in $1,000 increments.
3. Under the new tax plan passed by Congress and signed by the President in 2017, the higher estate tax threshold has made gift giving less urgent as a tax planning strategy.
Many individuals used the gift exemption as a way to provide for the next generation while also lessening the risk or burden of federal estate taxes. However, the 2017 tax reform doubled the value of an individual estate that is exempt from the estate tax to $11,180,000. A couple may take advantage of that individual exemption, and, with proper planning, shield $22.4 million in assets from the federal estate tax. Unless an estate is likely to reach the applicable threshold, gifts may not be as important of an estate planning tool solely to avoid estate tax consequences.
Long-term planners may want to keep in mind that the new estate tax exemption is set to expire at the end of 2025. If the $11,180,000 exemption is not extended by the end of 2025, the law will revert back to what it was before the 2017 tax reform, thereby returning the estate tax exemption threshold to around $5.5 million.
Disclaimer: While the estate tax changes may have made gifts less relevant as an estate planning tool for some, this certainly does not mean that gifts should be cancelled this year. The OSU Extension Farm Office cannot take responsibility for that. It only means that more families can focus on giving for love, rather than taxes.
For more information on federal gift taxes, contact an accountant or attorney, or visit the Internal Revenue Service’s “Frequently Asked Questions on Gift Taxes” here. For more general information about how taxes affect agriculture, visit the OSU Extension Farm Office Tax Law Library here.
The Ohio legislature has approved a repeal of the Ohio estate tax, but the tax will remain in effect for another 18 months. The new law removes the Ohio estate tax obligation for any person who dies on or after January 1, 2013. Governor Kasich signed the provision into law on June 30, 2011 as part of the state's budget package. The final version of the repeal differed from the language proposed earlier this year in H.B. 3, which proposed ending the estate tax as of January 1, 2011 (see our earlier post).
A bill introduced in the Ohio House of Representatives proposes a complete repeal of the Ohio estate tax. Representatives Grossman and Hottinger introduced H.B. 3 on January 11, 2011. The bill is simple: it amends the estate tax provisions currently in Ohio law to state that the tax provisions apply only to estates of persons who died before January 1, 2011. Regardless of when the bill would become effective, persons dying after January 1, 2011 would not be subject to the estate tax. The bill also removes the estate tax return filing requirement for estates of persons dying after the January 1, 2011 date.
The Ohio estate tax is a graduated tax on a person's gross taxable estate, less deductions and exemptions. An estate valued at less than $338,333 pays no tax due to credits and exemptions included in the law. Estates between the value of $338,334 and $500,000 pay a 6% estate tax while estates over $500,000 in value owe a 7% estate tax. The state receives 20% of the estate tax revenue and the local government of the decedent's residence receives the remaining 80% of the tax. Ohio is one of 17 states that have an estate tax.
How is agriculture affected by the Ohio estate tax? It's not uncommon for a farm estate to be valued at the taxable threshold of $338,334. However, qualifying farm properties that elect the special use valuation option in the estate tax law can further reduce the taxable amount of the estate up to an additional $500,000. The special use valuation election provides that qualifying farmland will be valued at the lesser Current Agricultural Use Valuation amount; qualifications for the election relate to keeping the farm in the family. Sound planning and proper use of special use valuation thus can reduce the Ohio estate tax burden for farms that intend to continue the farm business after the loss of an active farm family member.
The idea to repeal the estate tax is not a new one; several prior attempts have not met with success. A bill identical to current H.B. 3 was proposed last year, but the bill never made it out of the House Ways and Means committee. Will the change in Ohio's elected officials yield different results? The current House Ways and Means committee will hear sponsor testimony on the H.B. 3 at its hearing on January 26, 2011.View H.B. 3 here.
Since 2000, Ohio law has allowed property owners to avoid the probate process with a transfer on death deed, a deed that automatically transfers real property to a designated beneficiary upon the death of the property owner. Under a new Ohio law, such transfers now require the preparation of an affidavit rather than a transfer on death deed. The new law also allows those who hold "survivorship rights" in property to transfer their rights upon death, which the previous law prohibited.
The changes occurred in S.B. 124, which became effective upon the governor's signature on December 28, 2009. The Ohio State Bar Association's Real Property Law Section proposed the changes to simplify the transfer on death process and remove confusion over the rights of those holding survivorship deeds.
One “trust mill” is on its way out of Ohio, thanks to a recent ruling by the Ohio Supreme Court. On October 14, 2009, the Court issued a hefty $6.4 million penalty against American Family Prepaid Legal Corp. and its affiliate, Heritage Marketing and Insurance Services, Inc. The Court barred the companies from doing business in Ohio. The California-based companies targeted elderly Ohioans by offering a full array of estate planning services that would allegedly minimize estate probate costs. Non-attorney salespeople contacted elderly persons and marketed a $1,995 prepaid estate plan, which essentially amounted to one living trust. Upon delivery of the living trust to client homes, the salespersons also marketed insurance products. The sales were high-pressure, according to the Court. Credit must be given to the Columbus Bar Association for pursuing the case. After receiving repeated complaints about the companies, the CBA investigated and determined that the companies were condoning the unauthorized practice of law. While an attorney in California drafted the trust documents, non-attorney salespersons interacted with the clients, provided legal information, and answered legal questions. The Supreme Court had no sympathy for the companies and their sales scheme, and accurately described the “trust mill” issue that causes much frustration and concern in the legal profession. Said the court:
"A living-trust package is often not needed and may even be harmful for persons who are without significant assets, who have simple estates, or whose estates may need court supervision. A basic living-trust package...may even be insufficient and completely inappropriate for those having more substantial assets and who may need specific legal advice and even tax advice to meet their needs. ... [t]hese enterprises, in which the laypersons associate with licensed practitioners in various minimally distinguishable ways as a means to superficially legitimize sales of living-trust packages, are engaged in the unauthorized practice of law...by facilitating such sales, licensed lawyers violate professional standards of competence and ethics."
A misfortune of the case is that the companies have declared bankruptcy and ceased operations. The Columbus Bar Association is exploring whether it can collect the fine from another insurance company owned by the father-son team behind the defunct companies. The CBA hopes to distribute any amounts it collects back to victims of the trust scam. To read the court's opinion, visit here.