Estate Planning Without Using Wills or Trusts
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.