Oklahoma Cooperative Extension ServiceDivision of Agriculture Sciences and Natural ResourcesOklahoma State University

April 2009

Estate Planning

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.

• 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.

Joint Tenancy – With Rights of Survivorship

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 non-joint

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”)• TestamentaryDuration 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

2.2. BeneficiariesBeneficiaries

3.3. Duration of TrustDuration of Trust4. 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

5.5. Uses of trust income Uses of trust income and principaland principal

6.6. Timing of distribution to Timing of distribution to beneficiariesbeneficiaries

• 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.

LIVING TRUSTSAdvantages

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.

• Marital Deduction Trust• Charitable Trust• Reversionary Trust “Clifford Trust”• Life Insurance Trust• Power of Appointment Trust

Special Purpose Trusts

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.

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.

Do you still need a will if you have a 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

• Federal Estate Taxes• Oklahoma Estate Taxes• Taxes levied on the estate, not

on the recipient of the assets.

Taxing the Estate

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 tenancyA. 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 VALUATIONFOR 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 VALUATIONFOR 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 = $500Gas = $300

Valuation = 500 x 48= $24,000300 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

=Current Use

Value

32.50 – 2.50

0.0775

=$387.10

X 200 ac = $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 Credit2. Marital Deduction3. Transfers to exempt charitable,

religious and similar institutions4. Claims against estate,

administration, funeral, unpaid taxes, etc.

1/ Gift tax unified credit exemption remains at $1,000,0002/ Gift tax rate if we do repeal estate tax

2005 $780,800 $1,500,0001

/ 47%

2006 $780,800 $2,000,0001

/ 46%

2007 $780,800 $2,000,0001

/ 45%

2008 $780,800 $2,000,0001

/ 45%

2009 $1,455,800 $3,500,0001

/ 45%

2010 Repealed Repealed 35%2/

2011 $345,000 $1,000,000 50%

Unified Estate and Gift Tax Schedule

Column A

TaxableAmount over

Column B

Taxable amount not over

Column C

Tax on amount in column A

Column DRate of tax on excess over amount in column A

0$10,00020,00040,00060,000

$10,00020,00040,00060,00080,000

0$ 1,800

3,8008,200

13,000

(Percent)1820222426

Table 1. Unified Rate Schedule

Column A

TaxableAmount over

Column B

Taxable amount not over

Column C

Tax on amount in column A

Column DRate of tax on excess over amount in column A

$ 80,000100,000150,000250,000500,000

$100,000150,000250,000500,000750,000

$ 18,20023,80038,80070,800

155,800

(Percent)2830323437

Table 1. Unified Rate Schedule

Column A

TaxableAmount over

Column B

Taxable amount not over

Column C

Tax on amount in column A

Column DRate of tax on excess over amount in column A

$ 750,000

1,000,0001,250,0001,500,0002,000,000

$1,000,0001,250,0001,500,0002,000,000

…

$248,300345,800448,300555,800780,800

(Percent)3941434445

Table 1. Unified Rate Schedule

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 crypt3. $500 monument4. Debts of the estate, attorneys fees,

and others

1998199920002001

2002 & 200320042005

2006 & 200720082009

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 Exemptions

Oklahoma Estate Tax Rates

Taxable Estate Equal to or more than

Taxable Estate Less than

Tax on Amount in Column 1

Rate of Tax on Excess Over Amt. In Column 1

$--0—10,00020,00040,00060,000

100,000250,000500,000750,000

1,000,0003,000,0005,000,000

10,000,000

$10,00020,00040,00060,000

100,000250,000500,000750,000

1,000,0003,000,0005,000,000

10,000,000

$--0—50

150 450850

1,8506,350

22,60040,10058,850

218,850388,850838,850

.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.

1. May serve without bond.2. May give one notice to creditors.3. Spouse alone may appraise

inventory.4. May prepare tax return.

SURVIVING SPOUSE AS EXECUTOR

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 $ 30,000 1970Estate Value $100,000 2009

Surviving Spouse’s Basis

½ of Original Cost = $15,000½ of Estate Value = $50,000 Tax Basis $65,000

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

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-date4. Last surviving spouse should have

will.

STRATEGIES IN SMALL ESTATES

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 ANDCONCLUSIONS

GENERAL PRINCIPLES ANDCONCLUSIONS

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).

• 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.

Conclusions

What did one casket say to the other?

Is that you coffin?

The End

Questions & Comments