Estate Planning

  1. Definition of Estate Planning
  2. Summary of Estate Planning
  3. Legal Forms
  4. Burial Instructions
  5. Canceling Installment Note (SCIN)
  6. Private Annuities
  7. Planning Options For Minor Will Beneficiaries
  8. Ohio Residency Rule

Definition Of Estate Planning

Estate planning is the process of providing for the orderly disposition of property upon death consistent with the estate owner’s desires. Estate planning also includes planning for problems that arise during one’s lifetime, such as providing for the possibility of becoming physically or mentally disabled, health care decisions and catastrophic illness.

The typical objectives in estate planning for most people are:

  1. To pass their estate and/or specific property to the desired persons in a smooth and orderly manner avoiding any conflicts, disputes, hurt feelings or litigation among the beneficiaries or with the IRS or other third parties.
  2. To minimize or avoid estate tax.
  3. To minimize costs associated with administering their estate.

Estate Planning Summary

Estate planning generally consists of the following legal documents and issues:

1. Will and/or Trust
2. Declaration of Funeral/Burial Instructions
3. Power of Attorney
4. Health Care Power of Attorney
5. Living Will
6. Long Term Care Insurance Policy
7. Asset Protection Planning from Nursing Home Costs

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Legal Forms

A legal form is a document written for a defined set of circumstances. Every person’s circumstances are different and a legal form always needs to be changed to fit each person’s circumstances. Failure to do so could cause problems such as the person’s intended beneficiaries not receiving the estate or lead to litigation or financial loss. There are no “official” or “standard” will, trust, living will or other legal forms in the sense that they are approved by the legislature, Courts, or used by all lawyers. There are many different forms available from different sources.

How do you know you have chosen the right form?

Does the form comply with Ohio law?

Has the relevant Ohio law changed since the form was made?

If the form is invalid for some reason, will you be able to hold someone financially responsible if you suffer a loss?

Has the document been properly signed according to Ohio law?

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Burial Instructions

Ohio law, beginning on 10/12/06, provides for an enforceable legal document setting forth instructions relating to burial and funeral arrangements. Prior to such time, there was no Ohio law authorizing an enforceable document relating to such arrangements. Such provisions that were sometimes contained in a Will or letter were unenforceable.

The impetus of this law was the increasing incidence of disputes among family members concerning the details of burial, cremation and funeral services. Such disputes are distasteful and costly. One of the primary objectives of estate planning is to avoid any type of dispute or problems in the settlement of an estate. More importantly, a person’s desires concerning their burial should be clearly set forth and followed by the family.

This “Declaration” can include a statement of your preferences concerning your burial or cremation and appoints a representative to exercise the right of disposition for your body upon your death. This includes the right to direct the disposition of your body, to make funeral arrangements and arrangements for burial, cremation or other manner of final disposition of your body. The person you name as the representative has the legal responsibility and right to make all final decisions on such matters. This Declaration is different from a prepaid funeral plan. Although such a plan may be a good idea, it is not legally enforceable or required to be followed by the family. The next of kin or other person making funeral arrangements could ignore the plan. However, use of the Declaration can make the prepaid plan details legally binding.

In the absence of such a document, Ohio law sets forth the following persons, in the order of priority shown, as the person with the legal right to make such arrangements:

  1. Surviving spouse;
  2. All children;
  3. Parents;
  4. All siblings.

If you have special religious or other intentions concerning the disposition of your body after death, then it is very important to have this document to clearly express this in writing. Even if you have no special intentions, the appointment of one person with legal authority to make all these burial and funeral arrangements is important to avoid any possible conflicts.

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Canceling Installment Note (SCIN)

A SCIN provides for a sale of property to the children or other heirs. For example, A sells property worth $1,000,000 to his heirs. The heirs sign a note agreeing to pay $50,000 per year for 20 years. However, if A dies before full payment at the end of 20 years, the balance due on the note is forgiven. Neither the property nor the note is included in the estate when A dies.

Whether or not this technique is successful depends on how long A lives. The terms of the note must be set-up according to IRS life expectancy tables and federal interest rate requirements. These actuarial table cannot be used if there is a 50% or greater probability that the person will not survive for more than one year. In this case, a SCIN will not be a good planning option. If the person actually does survive for more than 18 months, then they are presumed to not have met this 50% test.

Private Annuities

This planning technique involves a sale to heirs in return for a lifetime annuity. For example, A sells property to his heirs worth $1,000,000 in return for payments of $70,000 per year for the rest of his life. When A passes away, neither the property nor the annuity is included in the estate.

The annuity must be structured to comply with IRS life expectancy tables and federal interest rate requirements. Again, the success of this plan depends on how long A lives compared to the actuarial assumptions.

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Planning Options For Minor Will Beneficiaries

If you have designated beneficiaries or possible contingent beneficiaries in your Will who are minors (under age 18), you need to consider various options for providing for such beneficiaries in your Will. In general, the options are as follows:

1. If there is no special clause or other planning provision for minors, then their share of the estate will go into a guardianship to be administered in the Probate Court. Someone must apply to be appointed guardian and they will be responsible for managing the minor’s estate until the age of 18. The guardian must file an Account periodically with the Probate Court setting forth all receipts and disbursements related to the guardianship estate along with receipts for all disbursements. The guardianship proceedings will incur substantial time for the guardian as well as court costs and attorney fees. Upon attaining the age of 18, the child will then receive a full distribution of the guardianship estate.

2. The Will can contain a clause authorizing distribution to anyone under the age of 21 in the form of a custodian account also known as the Uniform Transfer to Minors Act. A person is named as the custodian to manage the property for the child. There is no requirement to report to any Court and generally no reason to incur attorney fees in the management of the custodian account. Funds in the custodian account can be used for the benefit of the child as determined by the custodian. Upon attaining the age of 21, the child will then receive a full distribution of the property. If you feel comfortable with a full distribution at age 21 considering the estimated amount of the share of the estate and the child’s personality, then this is probably the best option. There is usually no additional cost for this custodian provision in the Will.

3. The other option is to create a Trust. The Will would provide that if the beneficiary is under a certain age that their share is distributed to a certain Trust. The terms of the Trust are flexible and you can state whatever you wish concerning an age for distribution and the standard for distributions by the trustee prior to such age. The above options 1 & 2 do not allow for any flexibility to change the age of distribution or any other standards. The Trust would be an additional cost for your estate plan.

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Ohio Residency Rule

A person’s legal residency is important for determining which State is entitled to collect income, gift and estate tax. For most people, it is usually easy to determine residency if they spend all their time in one State. However, this may not be clear for persons who spend a significant amount of time out of state at a second home. Some persons may also wish to change their residency in order to reduce taxes.

A person is considered an Ohio resident if they are “domiciled” in Ohio. The taxpayer’s domicile is a permanent legal residence that the taxpayer intends to use for an indefinite or unlimited period, and to which, when absent, the taxpayer intends to return. Thus, the primary test is a person’s intent. However, a mere statement of intent will not be sufficient to convince the tax authorities or a Court of law. The Courts will generally consider a long list of factors to determine legal domicile (e.g., voter registration, driver’s license, bank accounts, etc..). There has been substantial litigation in this area due to the subjective nature of this determination. In order to bring more certainty to this area, the Ohio Department of Taxation enacted income tax regulations in 1993 setting forth a bright line residency test. This test had three categories to determine residency:

  1. < 120 days: If a person had 120 (about 1/3 of the year) contact periods or less in Ohio during the taxable year and at least one house outside of Ohio for the entire year, then they are conclusively presumed not to be an Ohio resident.
  2.  > 183 days: If a person had 183 (about 1/2 of the year) or more contact periods during the year, then they were presumed to be domiciled in Ohio for the entire year. However the person could rebut this presumption with supporting evidence.
  3.  120-183 days: For persons with contact periods between 120 and 183, they are also presumed to be an Ohio domicile for the year. However the person could rebut this presumption with supporting evidence. The rule set forth factors to be considered for persons in this category.

The department adopted a new bright line residency test in 2007. The above three tests are removed. The minimum contact period increased from 120 to 183 but there is a new requirement for filing a form. The new test is as follows:

  1. A person will be treated as not domiciled in Ohio if they have no more than 182 contact periods in Ohio, have at least one house outside of Ohio for the entire year, and file the required form with the Ohio tax department. Therefore, if you do not file this form you do not get the benefit of the presumption and would need to provide further evidence of domicile.
  2. A person who has 183 or more contact periods in Ohio during the taxable year is presumed to be an Ohio resident. As before, this presumption can be rebutted with supporting evidence.

Although these rules strictly speaking govern only income tax in Ohio, compliance with these tests and related planning for all relevant factors will greatly assist in determining residency for estate tax and other purposes. The above is only a very brief summary of some very complicated regulations governing domicile in the State of Ohio. Anyone seeking to establish non-Ohio residency for income, gift or estate tax purposes, needs to do a great deal of planning based upon specific legal advice concerning their circumstances.

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