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.
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.
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.
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.
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.
Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
When we think of estate planning our thoughts usually go to a will or trust. However, in some situations, an effective estate plan can be implemented without the use of a will or trust. Using transfer on death or payable on death beneficiary designations, for some people, can be an adequate estate plan.
A transfer on death or payable on death designation can be added to almost any asset with a title. Transfer on death is used more for tangible assets such as land and vehicles while payable on death is used more for intangible assets such as financial accounts and life insurance. Both designations do the same thing – upon death, ownership is transfer from the deceased to the designated beneficiary outside of probate. This process of transferring ownership at death is usually simple and relatively easy.
The strategy of using beneficiary designations as the primary estate planning tool is best used when the distribution plan of assets is simple. For example, when the deceased’s assets will be divided equally among their children. Distributions plans that include more involved schemes such as unequal distributions, buy outs, leases or rights of first refusals are too complicated to use just beneficiary designations. In those situations, a trust-based plan will likely be needed. Using beneficiary designations as the primary estate planning strategy only fits a narrow band of farmers, but for those farmers and it can be an effective and relatively inexpensive plan.
Consider the following example. Mom and Dad’s farming operation is an LLC that holds farm machinery, livestock, and crops. They own 200 acres in their names. Their other assets include a bank account, retirement account and life insurance. At Mom and Dad’s death, they want all of their assets to go to their two children equally. Their net worth is $4 million.
In this example, the first thing to notice is that Mom and Dad are well under the federal estate tax limit. So, their estate plan does not need to be designed around minimizing estate taxes. Second, their plan is simple. Everything goes to their two children equally. Lastly, the assets they own are all titled assets that can include death beneficiary designations.
Mom and Dad can title their LLC ownership transfer on death to the children. Upon their deaths, the LLC ownership interests will transfer to the children outside of probate. The transfer is done with a few pieces of paper. The land can be made transfer on death by recording a Transfer on Death Affidavit. Upon Mom and Dad’s death, the children will record an affidavit with a death certificate and title is transferred – again, without probate. The children can be added as the payable on death beneficiaries of the financial accounts and life insurance. After death, the children will file paperwork with the financial institutions and funds will be transferred to them outside of probate. A $4 million estate has been transferred without the need to use a will or trust and probate has been avoided.
While this strategy does not use a will or trust for the transfer of assets, it is still a good idea to have a will as a backup. In the above example, Mom and Dad execute wills that state all of their assets go to their children equally. The will is there in case a beneficiary designation is in error or an asset is overlooked and must go through probate. The goal is not to use a will but there should be one as a backup just in case Mom and Dad forgot to add a transfer on death designation to the old livestock trailer that they haven’t used in five years.
The following assets can all have transfer on death or payable on death designations added to their title: vehicles, titled trailers, trucks, boats, real estate, bank accounts, financial accounts, life insurance, stocks, and business entities. Assets such as livestock, grain, crops and machinery are untitled so a transfer on death designation cannot be added. However, transferring those untitled assets into an LLC is a great way to essentially convert untitled assets to titled assets. After the untitled assets are transferred to the LLC, the LLC ownership can include a transfer on death designation.
When considering estate plans, farmers who have relatively simple plans and can add death beneficiary designations to all or most of their assets may not need a complicated will or trust. The beneficiary designations can be the primary estate plan with a simple will as backup. This strategy is effective, minimizes legal costs and avoids probate. As stated above, this strategy is not for everyone, but it should be considered. For more complicated plans or for high-net-worth individuals, a trust may be needed.
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.