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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.

Ohio Farmland Leasing Update webinar
By: Peggy Kirk Hall, Tuesday, July 26th, 2022

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

Here are the topics we’ll cover:

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

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

By: Robert Moore, Thursday, July 21st, 2022

Legal Groundwork

A challenge that many farm families face is how to bring the next generation of farmers into the farming operation.  In addition to the challenges of management, delegation of responsibility and communication, the intensive capital nature of farming presents a unique challenge to many farm families.  That is, how to bring a 25 year-old into a multi-million dollar farming operation?  The next generation farmer may not have the resources to buy into the farming operation.  Also, the current generation may not want to make a large gift to get the next generation into the farming operation.   Using multiple entities can help reduce the challenges of this situation.

Let’s start with a typical farming operation that has all assets under common ownership, either as individuals or an entity.  The value of this entity is the combined value of all the farm assets.  For the next generation farmer to gain ownership in this operation, the total value of the farm assets is used to calculate their buy in or gift.  This scenario is illustrated in the following diagram:

Graphical user interface, text, applicationDescription automatically generated

In this scenario, Mom and Dad own all the farming assets in their names.  The total farming operation is valued at $3.5 million.  For Daughter to even enter the farming operation as a small percentage owner, say 10%, she should either need $350,000 to buy into the operation or Mom and Dad would need to gift her $350,000.  Also, Mom and Dad may be reluctant to give Daughter part ownership of the machinery and land in event Daughter ends up not staying on the farm.

To overcome this difficult situation, the farming operation is divided into three separate entities.  The operating assets are held in an Operating LLC, the machinery in a Machinery LLC and the land in a Land LLC.  By dividing assets among multiple entities, the total value of the farming operation has been divided among the entities.  See the following diagram:

Graphical user interface, text, application, chat or text messageDescription automatically generated

Each entity has a value which is considerably less than the total value of all farm assets.  Now, Mom and Dad can bring Daughter into the Operating LLC as a 10% owner for only $50,000.  Daughter may have $50,000 available for a buy-in or, more likely, Mom and Dad are more comfortable making a $50,000 gift.  Also, it may be possible to get the Operating LLC to a near $0 value by distributing out the cash and grain to Mom and Dad before Daughter enters the operation.

The entity diagram after Daughter becomes an owner in the Operating LLC is as follows:

Graphical user interface, text, application, chat or text messageDescription automatically generated

Daughter has become and owner in the Operating LLC and can help with management and decision making for the farming operation.  However, Mom and Dad retain full ownership and control over the machinery and land.  Perhaps after a few years, when Mom and Dad are more confident Daughter intends to stay on the farm, Daughter begins to buy into the Machinery LLC or is gifted ownership.  Or, perhaps Daughter eventually buys her own machinery for the farming operation.  The same can be done with the land LLC. 

When bringing in the next generation into the farming operation, a multi-entity should be considered.  It is a good method for the next generation farmer to enter the farming operation without the burden of accounting for the value of all farm assets.  It also allows the current generation to maintain ownership and control of the more important farm assets.

 

Person signing a contract
By: Peggy Kirk Hall, Tuesday, July 19th, 2022

Lawsuits over late terminations of farm crop leases might reduce after a new law in Ohio takes effect on July 21, 2022.  The law will affect situations where the parties in a farm crop leasing arrangement have not addressed a date or method for terminating the lease--typically verbal leases, although a written lease might also fail to address termination.  A landlord in those situations who wants to end the crop lease will have to do so by delivering a written notice of termination to the tenant operator by September 1.  A late attempt by the landlord to terminate the lease after September 1 would not be effective and the lease would continue for another crop year, although a tenant operator can choose to agree to accept a landlord's late termination.

Why the new law?

It's been common practice in Ohio for landlords and tenants to enter into a simple farm lease arrangement, usually verbal, that repeats from year-to-year with the only term up for discussion sometimes being the rental amount. Other important leasing details are overlooked, such as when the lease ends and what one party must do to terminate the lease.  The lack of these details is especially problematic when the land changes hands due to a sale or a landlord's death, or if another operator tries to "bid up" the leasing amount.  Without any termination notice provisions, the landlord might try to terminate the leasing arrangement in late Winter or early Spring, after the tenant operator made investments on the belief that the lease would continue for another crop year.   f the operator stands to lose investments and income, litigation is the likely outcome and a court will decide if the landlord attempted to terminate the lease "too late."  We'e seen many cases like this in Ohio.

Ohio's new law aims to reduce farm lease termination conflicts by requiring the landlord to give  advance notice of the intent to terminate the lease.  A termination by the landlord by September 1 should provide the operator with sufficient notice that the lease is not continuing, keeping the operator from making post-harvest and end-of-year investments for the next crop year.  This is a common law in other states, and Ohio is one of the last states in the Midwest to enact this type of "statutory termination date" for farm leases.

New law highlights the importance of a written farm lease

We always encourage parties to put their farm lease agreement in writing.  A written farm lease can detail important terms such as termination, preventing uncertainty in the future.  A written lease also complies with Ohio's Statute of Frauds. That law requires a farm lease to be in writing, meaning that verbal leases aren't automatically enforceable in a court of law.  Due to the Statute of Frauds requirement, parties to a verbal farm lease must convince the court that their lease deserves an "exception" from the law and if the exception is granted, would have to prove the terms of their verbal agreement.  Verbal leases are always at risk of non-enforcement and disagreement over the terms of the lease.

Using a written lease, the parties may agree to their own termination procedures and dates and the statutory termination law would not apply to their leasing arrangement.  The law is simply a default for those crop leasing situations that do not address termination.

Details of the new law

We've developed several questions and answers that help explain the new law, available here and in our newest Law Bulletin, Ohio’s New Statutory Termination Date for Farm Crop Leases, available on farmoffice.osu.edu.

What farm leases are subject to the new law?
The law applies to both written and verbal “agricultural lease agreements” that address the planting, growing, and harvesting of agricultural crops. The law does not apply to leases for pasture, timber, farm buildings, horticultural buildings, or equipment.

What if a lease already addresses termination?
The new law only applies when a leasing arrangement has not provided for a termination date or a method for giving notice of termination. If the landlord and tenant operator have addressed these provisions in their leasing situation, the provisions are unchanged by the law and continue to be effective.

When is the termination effective?
If a landlord gives notice of termination in writing by September 1, the law states that the lease is terminated either upon the date harvest is complete or December 31, whichever is earlier. However, the law allows the parties to establish a different termination date if agreed to in writing.

How must a landlord give notice of termination?
The landlord must give the notice in writing and deliver it to the tenant operator by hand, mail, facsimile, or email by September 1. The law does not require using specific language for the notice, but we recommend including the date of the notice, an identification of the lease property, and a statement that the lease will terminate at the end of harvest or December 31, 20____ unless the parties agree in writing to a different date.

What if a landlord terminates after September 1?
Unless the leasing arrangement provides otherwise, a termination delivered by the landlord after September is not effective and the lease would continue for another period. However, the tenant operator could agree to accept the late termination. If so, the parties should both sign a termination date agreement.

Can a tenant terminate a lease after September 1?
A tenant operator is not subject to the new law and can terminate a lease after September 1 unless the leasing arrangement provides otherwise.

Help with farm leases

Our farmland leasing library contains several resources about the legal aspects of farm leases.  We also address the economic side of farmland leasing with data on cash rents and farmland values, custom rates and machinery costs, and enterprise budgets.  If you need assistance finding an agricultural attorney who works with farm leases, we can help with that too; contact us by email at aglaw@osu.edu.  We'll do our best to help you reduce the uncertainty and risk of your farm leasing arrangement.

 

 

By: Barry Ward, Monday, July 18th, 2022

Barry Ward, F. John Barker, Eric Richer - Ohio State University Extension

Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform tasks is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Ohio Farm Custom Rates

The “Ohio Farm Custom Rates 2022” publication reports custom rates based on a statewide survey of 223 farmers, custom operators, farm managers, and landowners conducted in 2022. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and labor for the operation.

Some custom rates published in this study vary widely, possibly influenced by:

  • Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
  • Size and shape of fields,
  • Condition of the crop (for harvesting operations)
  • Skill level of labor
  • Amount of labor needed in relation to the equipment capabilities
  • Cost margin differences for full-time custom operators compared to farmers supplementing current income

Some custom rates reflect discounted rates as the parties involved have family or community relationships, Discounted rates may also occur when the custom work provider is attempting to strengthen a relationship to help secure the custom farmed land in a future purchase, cash rental or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.

New this year, the number of responses for each operation has been added to the data presented. In cases where there were too few responses to statistically analyze, summary statistics are not presented. 

Charges may be added if the custom provider considers a job abnormal such as distance from the operator’s base location, difficulty of terrain, amount of product or labor involved with the operation, or other special requirements of the custom work customer.

The data from this survey are intended to show a representative farming industry cost for specified machines and operations in Ohio. As a custom farm work provider, the average rates reported in this publication may not cover your total costs for performing the custom service. As a customer, you may not be able to hire a custom service for the average rate published in this factsheet.

It is recommended that you calculate your own costs carefully before determining the custom rate to charge or pay. It may be helpful to compare the custom rates reported in this fact sheet with machinery costs calculated by economic engineering models available online. The following resources are available to help you calculate and consider the total costs of performing a given machinery operation.

Farm Machinery Cost Estimates, available by searching University of Minnesota.

Illinois Farm Management Handbook, available by searching University of Illinois farmdoc.

Estimating Farm Machinery Costs, available by searching Iowa State University agriculture decision maker and machinery management.

Fuel price changes may cause some uncertainty in setting a custom rate. Significant volatility in diesel price over the last several months has caused some concern for custom rate providers that seek to cover all or most of the costs associated with custom farm operations. The approximate price of diesel fuel during the survey period ranged from $4.50 - $5.25 per gallon for off-road (farm) usage. As a custom farm work provider, if you feel that your rate doesn’t capture your full costs due to fuel price increases you might consider a custom rate increase or fuel surcharge based on the increase in fuel costs.

For example, let’s assume the rate you planned to charge for a chisel plow operation was based on $4.50 per gallon diesel costs and the current on-farm diesel price is $5.50 per gallon. This is a $1 per gallon increase. The chisel plow operation uses 1.15 gallons of fuel per acre so the added fuel surcharge could be set at $1.15 per acre (1.15 gallons x $1 gallon).

 The complete “Ohio Farm Custom Rates 2022” publication is available at: https://farmoffice.osu.edu/farm-management/custom-rates-and-machinery-costs

 

 

 

 

Posted In: Business and Financial, Crop Issues
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Comments: 0
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
A farm valley and cattle in central Norway.
By: Peggy Kirk Hall, Tuesday, July 12th, 2022

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

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

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

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

By: Robert Moore, Friday, July 08th, 2022

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

Legal Groundwork

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In: Property
Tags: Right of First Refusal
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/.

 

NALC and USDA logos

By: Robert Moore, Friday, July 01st, 2022

Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law ProgramLegal Groundwork

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.