«ESTATE PLANNING A Simplified Guide for Oklahoma Farm and Ranch Families Circular E-726 Oklahoma Cooperative Extension Service Division of Agriculture ...»
A Simplified Guide
for Oklahoma Farm
and Ranch Families
Oklahoma Cooperative Extension Service
Division of Agriculture Sciences and Natural Resources
Oklahoma State University
Revised June 2007
Estate Planning Problems
Estate Planning Objectives
How Property Is Owned
Kinds of Property
Ways of Owning Real Property
Fee Simple Ownership
Fee Simple Determinable
Fee Simple Estates Subject to Condition Subsequent
Tenancy by the Entirety
The Deed as Evidence of Ownership
Purpose of Recording a Deed
Importance of Delivery
Estate and Gift Taxes
Federal Estate Taxes
Federal Gross Estate
Taxing Joint Tenancy Property
Current Use Value
Computing “Current Use” Value
Recapture of “Current Use” Benefits
Increase in Basis of Property on Which a Recapture Tax is Paid
Computation of the Taxable Estate
Special Benefit for Family-Owned Business
Federal Estate Tax Rates
Determining Taxes for Spouses
Credits Against Federal Estate Tax
Federal Estate and Gift Tax Credit
Credit for State Death Taxes
Installment Payment for Estate Taxes
Federal Gift Taxes
Marital Gift Taxes
Gift Tax Computations
Example of Gift Tax Computations
Taxable Gifts and Decedent’s Final Estate Taxes
Other Gift Items
Basis of Property Received Within One Year of Death
Annual Payment of Gift Tax
Oklahoma Gift Taxes
Oklahoma Estate Tax
Deductions and Exclusions
Oklahoma Estate Tax Rates
Transfer by Contract
Outright Sale, with Mortgage Back
Land Contract (Purchase Contract)
Reserving a Life Estate
Transfer by Gift
Transfer by Combined Sale and Gift
Transfer by Co-ownership
Transfer by Will
General Provisions Applying to All Wills
Types of Wills
Changing or Correcting a Will
Importance of Legal Assistance
Transfer by Law of Descent
Survivor’s Homestead Rights
POD or TOD Registration
Estate Planning Aids
Kinds of Trusts
Duration of Trusts
Special Purpose Trusts
Other Uses of Trusts
Terminating Life and Joint Tenancies
Some Duties of an Executor
Surviving Spouse as Executor
Estate Settlement Costs
Executor or Administrator Fees
Court and Other Costs
Business Information Left to Survivor
General Estate Planning Guides
Glossary of Terms
Suggested References for Further Study
Property Distribution According to Laws of Descent in Oklahoma
ESTATE PLANNING1In broad terms “estate planning” involves the acquisition, investment, protection and disposition of assets. Oklahoma families are faced with many problems in transferring property to the next generation. Increasing numbers of farm families are becoming aware of these problems, and are searching for satisfactory methods of transferring property within their families.
This publication is intended to furnish basic information about the problems existing, to point out the many alternatives that are available, and to encourage more families to make adequate plans. Major emphasis in this publication will be placed on minimization of disposition costs. Careful estate planning under legal advice can reduce probate expenses and tax losses.
This circular is not designed as a substitute for legal advice. Rather, it is designed to acquaint families with the various alternative methods of land transfer and thereby enable them to consult legal counsel more intelligently. An informed client makes better use of the lawyer’s time. Farm families are encouraged to use this publication as a means of becoming informed and then to consult an attorney to develop a plan best suited to their own situation.
Estate Planning Problems Death is a certainty for all of us. Failure to carefully plan for this eventuality may result in inability to achieve your desired objectives. Consideration must be given, not only to the way property will be distributed at your death, but also to ensuring lifetime income for yourself and possibly a surviving spouse.
Certain characteristics of agricultural estates pose additional problems. Lack of liquidity may require the sale of business assets in order to pay estate taxes and debts. Indivisibility makes periodic gifts more difficult. In addition, many farm operations are very capital-intensive with low cash returns relative to the amount of investment. These problems are not unique to agriculture. Many estates involving other closely-held businesses encounter similar problems.
Faced with these problems, and not knowing what to do, many families do nothing, or delay planning until it is too
late. A few of the typical problems which may result from lack of planning include:
• The division of a farm under state inheritance laws results in small, uneconomical units.2 The combined value of the small units when sold separately may not equal the value of the farm when sold as a total unit; nor could the smaller units be separately operated as efficiently as the whole farm.
• The farm-operating heir may not be adequately compensated for contributions to capital improvements, labor and management, and the care of the parents. Under state inheritance laws, the heir will share equally with other brothers and sisters who have not made similar contributions.
• Guardianship of minor children may require close court supervision with numerous costs and restrictions where one or both parents die without a will.
• A will may be challenged for incompetency of the parent or parents who waited too long to make a will or the potential of undue influence being placed upon the parent from other sources or family members.
• Land may be divided and subdivided to the extent that it becomes difficult to obtain a mineral lease covering an entire tract inherited by widely scattered co-owners.
• It may be necessary to sell much of the estate if no provisions are made for payment of taxes and other costs.
• Estate taxes may be greater than they would have been if some other method of distributing the estate had been chosen.
• The farm-operating heir may be saddled with an impossible debt-load. This sometimes results from attempting to buy out the other heirs at an unreasonable price and on inadequate terms.
• Ill-feelings and bitterness may arise among heirs, resulting from lack of knowledge and understanding of the law.
• Parents may suffer from economic hardships due to unexpected illness or disability if insufficient property is retained to care for them adequately during their remaining years.
• Unnecessary problems may be created by not understanding implications of a joint tenancy or life estate.
• Problems may also arise from failure to consider desired qualifications of an executor.
Many of these problems could be eliminated by proper planning. Determining the facts in the particular transfer problem and understanding the alternative ways of handling the problem, are the first steps that must be taken.
Estate Planning Objectives Objectives in estate planning will vary from family to family, due to differences in resources, number of children, and value judgments. Clarifying the objectives is one of the first steps in logical, systematic estate planning. Objectives
often listed by families may include one or more of the following:
• To provide sufficient income to the parents for the rest of their lives.
• To reduce state and federal estate and gift taxes.
• To reduce lawyers’ fees, probate costs, and other fees.
• To reduce income taxes.
• To minimize disruption during estate settlement.
• To treat all children equitably, not necessarily equally.
• To keep the farm in the family.
• To help one or more of the children to start farming.
• To maintain and continue an efficient operating unit.
• To reward certain children for specific contributions they have made to the parents or to the estate.
• To provide for special needs of some heirs.
• To inform heirs what to expect, so they can make plans accordingly.
The fact that two or more objectives conflict should not deter families from making plans. It is in such cases that planning is most needed. Usually some compromises among the conflicting or competing objectives will have to be made, and it may be impossible to develop fully satisfactory plans. But the results of good planning will be far superior to unplanned property transfers.
How Property is Owned Kinds of Property There are two general kinds of property, called “real property” and “personal property.” Real property consists of land and the permanent improvements on it. Personal property includes movable items. Personal property may include tangible objects such as livestock, machinery, and household goods or intangibles such as bank accounts, bonds, stocks, and negotiable notes.
The law makes a distinction between real and personal property in matters of inheritance, sale, and mortgage. Also, tax laws and assessments are applied differently to each of these two kinds of property.
Ways of Owning Real Property Real property may be owned by one or more persons. Ownership may be classified by 1) type of estate and 2) if one or more people are co-owners, by type of co-ownership. Estates are a means of measuring ownership in terms of duration or a specific length of time. Leasehold estates involve a right to possession and use of property for a designated limited time period. Freehold estates are of potentially infinite duration or last for an unpredictable length of time. Types of freehold estates include fee simple ownership, life estate, fee simple determinable, and fee simple estates subject to condition subsequent.
• Fee Simple Ownership. Ownership of real estate in fee simple gives an unrestricted right to sell, mortgage, or dispose of the property during life or at death. It is the most complete estate that can be owned in land and includes all of the privileges of land ownership. All other types of freehold estate involve a subdivision of a fee simple estate into two estates: a present interest and a future interest.
• Life Estate. A person with a life estate in a farm who has the use of the farm during his or her lifetime is called a life tenant. Although the life tenant can sell the life estate, the buyer would have ownership rights only as long as the original life tenant lived. These rights do not become part of the life tenant’s estate. At the death of a party holding a life estate, the person or persons owning the reversion or remainder interest (all rights not held by the life tenant) would come into possession of the property. If the original owner of the property retains the right to possess the property after the death of the life tenant, this interest is known as a reversion. If the original owner gives the future ownership right to someone else, the future interest is called a remainder and the holder is the remainderman.
The owner of a reversion or remainder interest can sell or mortgage his or her interest prior to the death of the life tenant, but the buyer could not obtain present possession of the property until after the death of the life tenant.
In the case of homestead property, rights similar to those under a life estate are given to a surviving spouse.
The surviving spouse may continue to occupy the homestead and receive the income from the property to the exclusion of all adult heirs. The surviving spouse’s interest is similar to a life estate in the homestead, and it would endure so long as the surviving spouse occupied the homestead as his or her home. However, in the case of homestead property, the surviving spouse’s interest is personal and may not be sold or transferred to anyone else.
Conflicts sometimes arise between the life tenant and the remaindermen. The life tenant does have some legal responsibilities that help protect the interests of the remaindermen. The life tenant must avoid waste, which is the unreasonable use of the land that results in injury to the land. The injury must be permanent and affect the future possession and condition of the land. The life tenant must also pay ad valorem taxes and interest on mortgages on the property. The life tenant cannot force remaindermen to contribute to the cost of improving the property unless they consent to do so, even though the remaindermen may benefit from the improvements.
The value of the property in which the owner has reserved a life estate must be included in the estate of the life tenant. However, if the life estate is acquired by gift, inheritance, or will the value of that property would not be included in the life tenant’s estate.
• Fee Simple Determinable. This type of estate arises when property is conditionally transferred for a specific use but will revert back to the original owner or will go to the designatee if it ceases to be used for that purpose. For example, property might be given for use as a church but the grant might specify that if the property ceases to be used as a church, the property will once again belong to the original owner. In such a case, the church owners would have a fee simple determinable estate and the original owner would have a possibility of reverter.