Estate Planning
April 2009
Oklahoma Cooperative Extension Service
Division of Agriculture Sciences and Natural Resources
Oklahoma State University
Estate Planning – Introduction
• A single correct answer does not exist.
• No perfect solution exists
Laws change
Family situations change
• Must evaluate the good points and bad
points of each estate planning tool.
• The ultimate decision of what to do is
yours.
Estate Planning - Objectives
1. Provide sufficient income for you to
live comfortably and take care of
emergencies.
2. Make sure assets go to those you
want to receive them.
3. Minimize estate settlement costs.
Estate Planning Things to Keep in Mind
• Keep your plan simple.
• Maintain flexibility to change your
plans.
• Be sure to take care of yourself
first.
• You worked hard to accumulate
your estate, so enjoy it.
So, exactly what is your
“estate” anyway?
Your Estate
• Everything you own at the time
of your death.
Real Estate
Personal Property
Investments
Business Interests
Savings Accounts
Survivor Pension Benefits
Life Insurance Proceeds (if you own the policy)
How can real property be owned?
• Fee Simple: complete ownership
(Mine! Mine! Mine!)
• Life Estate: use for life,
then given to someone else
• Co-ownership
– Tenancy-in-Common
– Joint Tenancy
– Tenancy by the Entirety
Fee Simple Ownership
• All rights of ownership.
• Sell, give away, lease, use, etc. in
any manner the owner chooses.
Life Estate
1. Does not qualify for Marital deduction
2. The value of the life estate is not
included in the estate of the
recipient.
3. If donor retains a life estate and
deeds remainder interest, the full
value is included in the donor’s
estate.
Tenancy in Common
• Each owner has an undivided interest in the
whole property.
• Usually created when someone dies without
a will (intestate) giving one piece of property
to multiple parties.
• May cause problems when one
or more of the owners want to
sell their share.
• Can be messy when more
than one generation
is involved.
Joint Tenancy – With Rights of
Survivorship
• Most common type of co-ownership.
• Will has no effect on the transfer of this
property.
• Cannot use life estate or testamentory
trust with this property.
• Surviving joint tenant(s) receives all.
• May risk disinheriting children should
surviving spouse remarry.
Tenancy by the Entirety
• Same concept as Joint Tenancy
ownership.
• Restricted to husband and wife only.
• Cannot be severed without consent of
both parties.
• At death, all property transfers to the
survivor.
So how is ownership of estate
property handled when
someone passes away?
The basic concept
• When someone passes away, there
has to be some sort of mechanism to
transfer ownership of the estate.
• The most common are:
– The “intestate succession” process (no
will exists)
– The probate process (involves a will)
– Other contractual mechanisms (trusts,
joint ownership, insurance, contracts,
new Transfer-on-Death deeds).
Dying without a Will
(Intestate Succession)
• Property owned as Joint Tenants with
Rights of Survivorship will be
transferred to the surviving joint
tenant(s)/“contract” property handled.
• Probate-like court procedures the
transfer of the property to the heirs.
– Court appoints someone to administer the
allocation of property.
– Property is divided up according to
“default” rules in Oklahoma statutes.
Dying with a Valid Will
(Testate)
• Property owned in Joint Tenancy with
Rights of Survivorship will be
transferred to the surviving joint
tenant(s)/“contract” property handled.
• Other property is distributed
according to the directions outlined in
the will.
• Probate process oversees the transfer
of the property to the beneficiaries /
handles creditors.
Dying with a Living Trust
• Property owned in Joint Tenancy with
Rights of Survivorship will be
transferred to the surviving joint
tenant(s)/“contract” property handled.
• Other property is distributed
according to the directions outlined in
the Trust.
• Trustee or Successor Trustee
oversees the transfer of the property
to the heirs.
Challenges of Intestate Succession
• Leaves you with no control over how
your affairs are handled after you
pass.
– Unable to select who handles your affairs,
and several people may want to.
– Unable to direct who gets your property;
no provision for anyone other than lineal
ascendants/descendants
– No provision for stepchildren, nieces,
nephews, cousins, charities, etc.
Intestacy Scenarios
• Decedent is survived by spouse only –
no issue, no parents, no spouses.
– Spouse takes 100%, nothing to anyone
else.
• Decedent is survived by spouse, no
issue, BUT has one or more parents or
siblings.
– All joint industry property + 1/3 of nonjoint industry property goes to spouse.
– 2/3 of non-joint industry property is
divided among everyone else.
Intestacy Scenarios
• Decedent is survived by spouse and by joint issue
(issue whose parents are decedent and spouse) –
regardless of whether any parents or siblings
survive.
– Spouse gets ½ of entire estate.
– Joint issue get other ½ of entire estate.
– Parents and siblings take nothing.
• Decedent is survived by spouse and any issue of
decedent (issue of decedent whose other parent
was NOT the spouse).
– Spouse gets ½ of joint industry property and an equal
share of the non-joint industry property with the
decedent’s descendants.
– Decedents descendants divide up the other ½ of the joint
industry property and an equal share of the non-joint
industry property.
Intestacy Scenarios
• Decedent is survived by spouse and by joint issue
(issue whose parents are decedent and spouse) –
regardless of whether any parents or siblings
survive.
– Spouse gets ½ of entire estate.
– Joint issue get other ½ of entire estate.
– Parents and siblings take nothing.
• Decedent is survived by spouse and any issue of
decedent (issue of decedent whose other parent
was NOT the spouse).
– Spouse gets ½ of joint industry property and an equal
share of the non-joint industry property with the
decedent’s descendants.
– Decedents descendants divide up the other ½ of the joint
industry property and an equal share of the non-joint
industry property.
Will - Advantages
•
•
•
•
•
Leaves control with owner until death
- can be changed.
YOU direct where property goes.
May select executor.
May name guardian
(recommendation.)
Covers all property not held in Joint
Tenancy except insurance.
Will – Disadvantages
•
•
•
•
•
•
Must go through probate.
Easily contested.
Lengthy process to get estate
settled.
Can be costly.
Public process.
Property in another state must be
probated in that state.
Probate
1. Assure that creditors of decedent are
paid.
2. Establish rights of heirs to
decedent’s property. Most important!
3. Pay necessary income and estate
taxes.
Trust
• A set of instructions.
• Can be simple or complex.
• Must be carefully drafted to ensure
that your goals and objectives are met.
• Involves trustor, trustee(s),
beneficiary(ies), and
trust property.
TYPES OF TRUST
• Living (“Inter-Vivos”)
• Testamentary
Duration of a living trust
• Revocable
• Irrevocable
• (Rule Against Perpetuities)
A Living Trust Is...
The convenient way to pass your estate
to your heirs eliminating the stress and
financial burden of lawyers, courts, or
the probate system.
REVOCABLE LIVING TRUST
• Reduces probate cost.
• Does NOT reduce estate taxes of
grantor.
• If life beneficiary is named it will reduce
estate of beneficiary.
• May reduce income taxes.
• Avoid guardianship.
• Includes property owned in other states.
IRREVOCABLE TRUST
•
•
•
Cannot be terminated.
Reduces estate taxes.
May skip one generation of taxes.
TESTAMENTARY TRUST
• Takes place at death.
• Created by a will.
Items to Be Considered in Creating
Revocable Living Trusts
1. Trustee
–
–
Co-Trustee
Successor Trustee
2. Beneficiaries
3. Duration of Trust
4. Rights of Trustee
–
–
–
–
–
Buy, sell and lease property
Lease minerals
Invest funds
Distribute trust income
Distribute trust principal
Items to Be Considered in Creating
Revocable Living Trusts
5. Uses of trust income and
principal
6. Timing of distribution to
beneficiaries
LIVING TRUSTS
Advantages
•
•
•
•
Eliminates probate for assets in the trust.
Eliminate Executor’s fees.
Eliminates court costs for assets in the trust.
Eliminates the necessity of court appointed
guardian for minors or incompetents.
• Trust does not become public information.
• If Trustor is trustee, successor Trustee can
be identified in case of incapacitation.
• Nearly eliminates successful contest by
disgruntled heirs.
Disadvantages of Living Trust
•
•
Higher initial cost
More time and effort needed to get
assets transferred into the trust
–
•
The trust can only deal with property
that is in it.
May involve on-going trustee fees.
Special Purpose Trusts
•
•
•
•
•
Marital Deduction Trust
Charitable Trust
Reversionary Trust “Clifford Trust”
Life Insurance Trust
Power of Appointment Trust
MARITAL DEDUCTION TRUSTS
• Marital Deduction – Two Parts
– Part A – General Power Appointment
– Part B – Life Beneficiary –
Remainder to Children
– Used to maximize the Marital Deduction to
reduce estate taxes at the spouses death.
Charitable Trusts
• Permanent – Income paid to spouse
and at death remaining assets go to
charity
• Reversionary – Make annual donations
to charity and at specified time it will
cease.
Reversionary Trust
• Also known as a Clifford Trust
• Short-term
• Property reverts to trustor after a
certain period of time.
• Objective is to reduce income taxes.
• Use the lower tax rate of the
beneficiary.
Life Insurance Trusts
• Wide variety exists (seek an advisor).
• Has a wide variety of uses also.
• Can be used to pay estate taxes at
death.
• Can be Irrevocable.
Oklahoma’s New
Nontestamentary Transfer of Property Act
• Just enacted this legislative session.
• Long story short: Property owner can
now transfer property by recording a
“transfer on death” deed in the county
land records.
– Functions much like a “payable on death”
account.
– Does not require the formalities of a will.
Using the “Transfer on Death” Deed
1) Draft a deed describing the property
to be transferred and the party to
receive the interest upon death.
2) Sign and notarize the deed.
3) Record the deed in the county land
records office (and note – the deed
MUST be recorded prior to the death
of the grantor).
Effects of the Transfer-on-Death Deed
• Deed can be revoked or changed at any
time prior to grantor’s death by filing a
revocation in the county land records.
• Does not convey any interest in the
property until death of grantor.
• CAN’T BE REVOKED BY WILL.
• CAN’T DEFEAT JOINT TENANCY (can
only be used by last surviving joint
tenant).
What Will Beneficiaries Have to Do
to Claim their T-O-D Interest?
• Spouse of the grantor:
– File affidavit in county land records
stating:
• Fact of the death of the grantor
• Whether grantor and grantee were husband
and wife
• Legal description of property
• Someone other than spouse:
– All of the above PLUS:
• Copy of Death Certificate
• Estate tax release form
T-O-D Deeds:
Things You Should Know
• Property transferred by T-O-D deed
will still be considered part of the
grantor’s estate for estate tax
purposes.
• The beneficiary of the T-O-D deed will
take the property subject to all claims
on the property.
• Use of T-O-D deeds must be closely
coordinated with your existing estate
plan to avoid conflicts.
Do you still need a will
if you have a trust?
YES!
YOUR REVOCABLE LIVING TRUST
should provide a POUR OVER WILL.
This is necessary in case there are any
assets that are inadvertently left out of
the Trust.
LIFE INSURANCE IN
ESTATE PLANNING
1. Income for dependents in case of
premature death.
2. Retirement funds.
3. Provide cash for payments of estate
settlement costs.
4. Other contingencies.
Estate Taxation
Taxing the Estate
• Federal Estate Taxes
• Oklahoma Estate Taxes
• Taxes levied on the estate, not on
the recipient of the assets.
What is a Taxable Estate?
A Taxable Estate equals:
Value of All Property Owned
minus
Allowable Deductions
GROSS ESTATE APPRAISED
AT MARKET PRICE
1. Includes total real and personal property.
2. Full value of property owned in joint
tenancy except that owned with spouse.
3. After 12/31/81 one-half value joint tenancy
holdings with spouse.
4. Insurance owned or controlled by
decedent.
5. Taxable portion of gifts included in tax
base.
Decedent Must Own Property
1. Joint tenancy
A. Spouse – ½ in decedent’s estate.
B. Other than spouse
• Consideration furnished by decedent.
2. Property transferred to a revocable living
trust that pays all income to decedent or at
the direction of decedent is treated as
owned by decedent.
3. A decedent is not treated as owning
property solely by reason of holding a
power of appointment over the property.
4. In no event may basis be added to property
decedent acquired by gift (other than
spouse) 3 years prior to death
OIL & GAS VALUATION
FOR ESTATE TAXES & GIFTS
Oklahoma – Producing Minerals
• Monthly average production 6 months
before and after death
• Oil
– 12 Month Average Production times 48
• Gas
– 12 Month Average Production times 84
OIL & GAS VALUATION
FOR ESTATE TAXES & GIFTS
Oklahoma – Non-Producing Minerals
• Leased – 1.5 times the lease bonus if
the last lease was made within 1 year
of the date of death.
• Non-Leased – call the Estate Tax
Section of OTC (Values do change
monthly).
– or
• Non-Leased – utilize a geologist to get
a determination of the minerals.
Example
Monthly Averages:
Oil = $500
Gas = $300
Valuation = 500 x 48 = $24,000
300 x 84 = $25,200
$49,200
Wind Energy Valuation
• Look at the present value of future
payments as stated in the contract.
• If leased but not yet producing, has yet
to be determined.
CURRENT USE VALUE
• Executor may elect if . . .
– 1. Farm or other closely-held business assets
must compromise at least 50% adjusted gross
estate.
– 2. 25% must be farm real property.
– 3. Pass to qualified heir.
– 4. Owned and held as a farm by decedent or
member of family 5 out of last 8 years.
– 5. Decedent or member of decedent’s family
must have materially participated in the business
for 5 out of last 8 years.
– 6. Special evaluation cannot reduce estate by
more than $1,000,000 in 2009.
Computing “Current Use” Value
Rental Rate - Taxes
Current FLB Interest Rates
32.50 – 2.50
0.0775
=
= $387.10 X 200 ac
Current Use
Value
= $77,420
RECAPTURE of BENEFITS
Recapture occurs if property is
disposed of to non-family members or
ceases to be used for farming or for
closely-held business purposes.
Recapture (Continued)
• Full recapture within 10 years, phase out
between 10 and 15 (10 years recaptured
period after 1981)
• Partial dispositions – partial recapture
• Heir responsible for the tax
• Absence of material participation for 3 or
more years during any 8 year period
triggers recapture
• Two year grace period for qualified heir
Federal Allowable Deductions
1. Unified Tax Credit
2. Marital Deduction
3. Transfers to exempt charitable,
religious and similar institutions
4. Claims against estate,
administration, funeral, unpaid taxes,
etc.
Unified Estate and Gift Tax
Schedule
1/
2/
2005
$780,800 $1,500,0001/
47%
2006
$780,800 $2,000,0001/
46%
2007
2008
$780,800 $2,000,0001/
$780,800 $2,000,0001/
45%
45%
2009
$1,455,800 $3,500,0001/
45%
2010
Repealed
Repealed
2011
$345,000 $1,000,000
35%2/
50%
Gift tax unified credit exemption remains at $1,000,000
Gift tax rate if we do repeal estate tax
Table 1. Unified Rate Schedule
Column A
Column B
Taxable
Amount
over
Taxable
Tax on
amount not amount in
over
column A
0
$10,000
20,000
40,000
60,000
$10,000
20,000
40,000
60,000
80,000
Column C
0
$ 1,800
3,800
8,200
13,000
Column D
Rate of tax
on excess
over
amount in
column A
(Percent)
18
20
22
24
26
Table 1. Unified Rate Schedule
Column A
Column B
Taxable
Amount
over
Taxable
Tax on
amount not amount in
over
column A
$ 80,000
100,000
150,000
250,000
500,000
$100,000
150,000
250,000
500,000
750,000
Column C
$ 18,200
23,800
38,800
70,800
155,800
Column D
Rate of tax
on excess
over
amount in
column A
(Percent)
28
30
32
34
37
Table 1. Unified Rate Schedule
Column A
Column B
Column C
Taxable
Amount
over
Taxable
amount not
over
Tax on
amount in
column A
$ 750,000
1,000,000
1,250,000
1,500,000
2,000,000
$1,000,000
1,250,000
1,500,000
2,000,000
…
$248,300
345,800
448,300
555,800
780,800
Column D
Rate of tax
on excess
over
amount in
column A
(Percent)
39
41
43
44
45
MARITAL DEDUCTION
• Marital Gifts or Transfers
• Unlimited marital deduction at the
Federal level.
• Also unlimited in Oklahoma.
Oklahoma Allowable Deduction
1. $3,000,000 to lineal and collateral
heirs as of 1/1/2009
2. $1,000 burial lot or crypt
3. $500 monument
4. Debts of the estate, attorneys fees,
and others
Oklahoma Estate Tax
Exemptions
1998
1999
2000
2001
2002 & 2003
2004
2005
2006 & 2007
2008
2009
2010 & beyond
$ 175,000
275,000
475,000
675,000
700,000
850,000
950,000
1,000,000
2,000,000
3,000,000
repealed
Oklahoma Estate Tax Rates
Taxable Estate
Equal to or
more than
$--0—
10,000
20,000
40,000
60,000
100,000
250,000
500,000
750,000
1,000,000
3,000,000
5,000,000
10,000,000
Taxable Estate Tax on Amount
Less than
in Column 1
$10,000
20,000
40,000
60,000
100,000
250,000
500,000
750,000
1,000,000
3,000,000
5,000,000
10,000,000
$--0—
50
150
450
850
1,850
6,350
22,600
40,100
58,850
218,850
388,850
838,850
Rate of Tax on
Excess Over
Amt. In
Column 1
.5%
1.0%
1.5%
2.0%
2.5%
3.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
10.0%
Oklahoma: 2004 Amendment
Effective November 1, 2004
• A simplified affidavit can be filed
instead of an estate tax return for
lineal heirs when the net estate is less
than the applicable lineal exemption.
SURVIVING SPOUSE AS
EXECUTOR
1. May serve without bond.
2. May give one notice to creditors.
3. Spouse alone may appraise
inventory.
4. May prepare tax return.
GIFTS - FEDERAL
• New Amounts – After 12/31/09
– $13,000 per year per person
– $26,000 split gifts
– Unified tax credit can be used to offset gift
taxes due
– Gift tax due 4/15
GIFTS - OKLAHOMA
• No gift taxes after 12/31/81
• Three year contemplation of death
continues to apply.
Determining Basis of Property
• Purchased Property:
Purchase price + plus capital improvements depreciation.
• Gifts:
Same as DONORS PLUS a portion of GIFT
TAX paid.
• Inherited Property:
DECEDENT’S BASIS date of death
Basis of Inherited Property
Joint Tenancy Property Between Husband and Wife.
Cost
Estate Value
$ 30,000
$100,000
Surviving Spouse’s Basis
½ of Original Cost = $15,000
½ of Estate Value = $50,000
Tax Basis
$65,000
1970
2009
Power of Appointment Defined
The owner of property or the owner of
rights to dispose of property grants to
another person the power to designate
who shall receive the property.
POWER OF APPOINTMENT
1. May be created by will or deed.
2. Usually used to qualify for the federal
estate tax marital deduction.
3. Also used for other reasons.
LARGE ESTATE
STRATEGIES
1. Avoid large joint tenancy holdings.
2. Consider use of marital trust or life
estate.
3. Consider disclaimer.
4. Consider more balanced estates.
5. Make efficient use of marital
deduction and unified credits.
6. Consider current or special use
evaluation of land.
Disclaimers
• Provides for post death planning
• Irrevocable and unqualified refusal to
accept property
• Must be in writing
• Within 9 months
• Property must not be accepted and
must pass without direction to person
other than disclaimant
STRATEGIES IN
SMALL ESTATES
1. Make sure property goes to those you
intend to receive it.
2. If husband & wife elect joint tenancy,
make sure all property is owned in
joint tenancy.
3. Keep business affairs up-to-date
4. Last surviving spouse should have
will.
GENERAL PRINCIPLES AND
CONCLUSIONS
1. Avoid subjecting the total estate to estate
taxes and other estate settlement costs
more than once in large estates.
2. To develop the best plan estate settlement
costs must be computed for both spouses
and Federal and Oklahoma estate taxes
must be considered.
3. It is usually wise to take full advantage of
the marital deduction. Sometimes the
maximum marital deduction will not reduce
costs.
GENERAL PRINCIPLES AND
CONCLUSIONS
4. Executors and heirs should carefully weigh
the use of “current use” evaluation in farm
properties.
5. All parents should retain enough assets to
live comfortably and take care of any
emergencies.
6. Not only is the best estate plan different for
each family, but the best plan may change
with changes in the estate or family.
Other Important Estate
Planning Documents
• Durable Power of Attorney
• Durable Health Care Power of Attorney
• Living Will
Durable Power of Attorney
• Eliminate appointing a conservator
• Allows attorney in fact to act after the
principal is incapacited
Durable Health Care Power
of Attorney
• May convey the authority to:
– Withdraw treatment
– Make any necessary arrangements
Living Will
• Gives instructions to attending
physician for withdrawing life
sustaining medical procedures
• Formalities of execution must be
satisfied (signed & witnessed)
Conclusions
• Not one correct answer!
• Things change!
• Be aware of Oklahoma & Federal Estate
Taxes
• We don’t want to subject Estate to taxes
more than once
• If we have done a good job of Estate
Planning, we will minimize estate
settlement costs (estate taxes and
probate costs).
Conclusions
• Be sure to take care of yourself first.
• Don’t run out of money or property.
• Make sure you make up your own mind
and you feel comfortable with your
decision.
• Realize you will want to change your
mind at some point in the future, so
keep things flexible.
What did one casket say to the other?
Is that you coffin?
The End
Questions & Comments