After death, worldly goods pass to beneficiaries through various channels. A properly drafted and coordinated estate plan ideally ensures that assets pass as intended and spares family members the stressful, expensive battle when they are most fragile. An article from Morning Ag Clips, “A Good Estate Plan Coordinates All Assets,” focuses on a recent case in which a dispute involved a will, transfer-on-death designations, large debt and real estate in multiple states. This case, which took place in Ohio but could have occurred anywhere, demonstrates an important lesson for families owning a farm, ranch, or business: the estate plan has to address not only who gets what, but also how debts are paid and whether or not a particular asset should even be considered part of the probate estate.
A man’s estate included real estate in Ohio and a 40% interest in 1,900 acres of farmland in Tennessee. Both were subject to debt totaling about $2.7 million. His will left the Ohio real estate to a friend and his daughter a share of the Tennessee land. The friend and daughter were also equal beneficiaries of the estate's remaining assets. The will directed his debts to be paid through the estate.
The man also signed transfer-on-death affidavits for the Ohio real estate, naming the friend as the beneficiary. After his death, the Ohio real estate transferred directly to the friend. It didn’t pass through the probate estate. This became an important detail.
Some assets pass through a will. However, others pass through a designated beneficiary. Other ways to transfer property include transfer-on-death affidavits, payable-on-death accounts, life insurance, retirement accounts and other accounts with beneficiary designations.
This generally means the probate court’s authority is limited to assets belonging to the probate estate. If an asset passes directly to a beneficiary, they aren’t estate assets, even if they are mentioned in the will.
This was the central issue. The court held that the Ohio properties transferred to the friend under the TOD affidavits were not estate assets and were not available to pay the estate's debts. The estate still owed the debt. However, the Ohio properties had passed outside of probate.
The estate didn’t have enough personal property to pay the debts. Under some states’ laws, including Ohio, when estate assets are insufficient, the estate may sell real estate to pay the debt. However, the Ohio properties had gone directly to the friend, so they were not part of the probate estate. The Tennessee property was the estate's largest asset.
The friend, who was also the executor—beneficiaries are often executors, but it’s not always a good idea—sought to sell the Tennessee property to satisfy the debt. The court agreed the debt would be paid from the Tennessee land that was to go to the daughter, and it had no authority to require payment from the Ohio land.
The lesson: a will or trust doesn’t control how assets are distributed. The TOD affidavit controlled the Ohio property, not the will. That is why beneficiary designations and non-probate transfers must be coordinated with the entire estate plan.
When discussing asset distribution, you must address debt and the tax implications of assets. An estate plan needs to consider how all assets work together, including the will, jointly owned property, trusts, business interests and outstanding debt. A carefully drafted and coordinated estate plan can ensure that assets pass as intended, debts are addressed and family members are protected. The time to identify potential conflicts is before death, not after a court needs to settle an estate dispute.
Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. We help individuals and families establish living trusts, wills, powers of attorney, advance healthcare directives, and other essential estate planning documents designed to protect their loved ones and preserve their legacy. Schedule a quick and easy consultation with estate planning attorney Sedric E. Collins, Esq., or call 323-900-5450.
