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«ESTATE PLANNING A Simplified Guide for Oklahoma Farm and Ranch Families Circular E-726 Oklahoma Cooperative Extension Service Division of Agriculture ...»

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• Fee Simple Estates Subject to Condition Subsequent. These estates are very similar to fee simple determinable estates. The chief difference is that in the case of a fee simple determinable estate, the property ownership automatically goes to the future interest holder if the condition is broken, whereas in this type of estate, the future interest holder must take some action to gain title to the property after the condition is broken. If the interest holder fails to take any action, the holder of the Fee Simple Estate Subject to Condition Subsequent will continue to own the property. In this type of estate, the future interest holder has a right of reentry if the original owner retained the future interest or a power of termination if the right was given to someone else. Great care must be taken in creating either a fee simple determinable estate or a fee simple estate subject to condition subsequent to ensure that the wishes of the grantor are fulfilled.

Co-ownership One piece of property can also have two or more present owners, rather than being owned by just one individual.

Co-ownership can be for real property as well as personal property. In legal language, it is owned “in undivided interests.” There are three types of such co-ownership: tenancy-in-common, joint tenancy with the rights of survivorship, and

tenancy by the entirety. The type of co-ownership affects:

1. Who will inherit property

2. How it will be taxed for estate tax purposes • Tenancy-in-Common. Tenants-in-common have undivided interests in the same land. Two or more persons may be owners in undivided interests as tenants-in-common. Tenancies-in-common are frequently created by the laws of inheritance. For example, if a widow with two children owns a farm and dies without a will, the two children will each own an undivided one-half interest as tenants-in-common.

There is no right of survivorship between tenants-in-common. Each tenant-in-common can sell or devise (will) his share. For example, if two married brothers own 320 acres as tenants-in-common and one brother dies, his one-half interest would pass to his heirs and be included in his estate for estate tax purposes. It would only pass to the surviving brother if he were an heir designated to receive the property.

If two or more persons own property jointly, it is normally presumed that they own as tenants-in-common unless the deed or title documents clearly indicate that a right of survivorship was intended.

• Joint Tenancy. The owners are called “joint tenants.” The joint tenants do not have to be husband and wife. When one joint tenant dies, his or her undivided interest is distributed equally among the surviving joint tenants. This is the characteristic peculiar to joint tenancy, and is referred to as “right of survivorship.” Under Oklahoma law3 a joint tenancy can be created by the present owner deeding property to himself or herself and another as joint tenants or by a third party transferring property to two or more persons in a deed that specifies they will own as joint tenants. Use of words “and/or” alone is insufficient to create joint tenancy. Since some institutions or firms do not rigidly follow the law in this respect, it is best to review and decide with your legal counsel how titles should be held for bank accounts, savings and loans, bonds, stocks, insurance policies, and automobiles. Inadequate or improper wording may result in unnecessary litigation or additional estate taxes. A common abbreviation designating joint tenancy, as used here, is “J.T.W.R.O.S.,” meaning joint tenancy with rights of survivorship.

A joint tenant can sell or mortgage their interest, but cannot dispose of it by will. If a husband and wife own real property as joint tenants and the husband dies, the wife takes full ownership to the exclusion of the children. It is possible for the joint tenancy to be broken by one joint tenant conveying his or her interest outside the existing joint ownership.

For estate tax purposes, generally the entire value of joint tenancy property is included in the estate of the first joint tenant to die, but it may be reduced by the proportionate value contributed by the survivors.4 There is an exception for gifts of joint tenancy property to a spouse which occurred after December 31, 1976. See Section “Taxing Joint Tenancy Property.” • Tenancy by the Entirety. Tenancy by the entirety is a type of joint tenancy between husband and wife that is characterized by the fact that neither party can sever it without the consent of the other. Upon the death of one, the survivor acquires title to the property. This type of ownership is similar in nature to joint tenancy. Therefore, it is recommended that the deed or contract specifically refer to tenancy by the entirety if this type of co-ownership is desired.

The Deed as Evidence of Ownership A deed represents evidence of ownership of real estate. Thus, it is the instrument by which a real estate owner acknowledges transfer of the property to a new owner. There are two kinds of deeds that are customarily used in conveying land: warranty deeds and quitclaim deeds.

• Warranty Deeds. A warranty deed usually contains the phrase, “and warrants the title thereto.” Such a deed contains covenants (assurances or guarantees) of title that impose contractual liability upon the grantor (person transferring title). Typical covenants are: 1) that the seller had an estate free of adverse claims in fee simple with the right and power to convey, 2) that the property was free from encumbrances of liens except those listed on the deed, and 3) that the buyer will have quiet and peaceable possession and the seller will defend title against all persons lawfully claiming it. A warranty deed actually conveys no more title than does a quitclaim deed. However, if a warranty deed is used, the grantor may be held liable if the title is limited, defective, or encumbered. For example, if the property being conveyed by warranty deed is mortgaged and the deed is not made subject to the mortgage, then the grantor may be personally liable for any damages suffered by the grantee (person receiving the title). Such liability of the grantor may even extend beyond the grantee to subsequent grantees. The warranty deed also assures the grantee that if the grantor did not have title at the time of delivering the deed, but should later acquire title, then the grantee will thereby receive all of such title.

• Quitclaim Deed. A quitclaim deed indicates that the seller is conveying whatever rights he possesses in the property to the buyer but does not promise that the seller owns anything. Such a deed does not obligate the grantor beyond his present ownership. If the grantor has no interest in the property, none will be conveyed. A quitclaim deed contains the words “and quitclaim” as a usual term in the granting clause of the deed. It is possible to insert in the quitclaim deed an additional clause by which the grantor obligates himself to convey all interest, if any, which he may thereafter acquire in the land. This would accomplish one of the additional protections of a warranty deed but would not help the buyer if the seller never acquired title.

• Purpose of Recording a Deed. Deeds should be recorded, not for the purpose of giving them validity, but to give notice of their contents and effects to all the world. To be recorded, the deed should be acknowledged with a declaration that the grantor personally appeared before a public officer, such as a notary public, and certified that the deed was voluntarily signed by the grantor. Deeds are recorded in the County Clerk’s office of the county in which the land is located.

• Importance of Delivery. Sometimes a grantor will sign a deed covering land which he or she wants to keep until death expecting the deed to be the method by which title to the land is transferred. Instead of delivering the deed directly to the grantee, the owner places the deed in a safety deposit box or among private papers. Undelivered deeds like these are commonly called “dresser drawer deeds.” Such deeds are invalid because they were not delivered to the grantee or his or her agent during the lifetime of the grantor. Delivery is necessary to accomplish a conveyance by deed.

Unless the deed is drawn and executed in the form of a will (which would be extraordinary and unusual), it could not become legally effective without delivery of the deed to the grantee or his agent. One alternative for handling this problem is for the grantor to retain a life estate for himself and transfer a remainder interest to the person he wants to own the property after death. At death, the property would automatically pass to the remainderman. This may, however, present problems in terms of potential conflicts between the life tenant and remainderman regarding management of the property.

The deed could also be delivered to an escrow holder, who acts independently of both the grantor and grantee, with instructions that the escrow holder is to deliver the deed to the grantee upon the completion of certain acts or the happening of a certain event. In such a case, the law regards the date when the deed was delivered to the escrow holder as the effective date of the delivery, which makes the deed valid. The law would not pay any attention to the date when the deed was physically delivered to the grantee and, therefore, it would not make any difference if the grantor were dead at the time when the grantee received the deed. Escrow transactions are frequently used to overcome the risk of a grantor’s death pending the closing of a prolonged real estate transaction or one involving installment payments extending over many years.

The key to effective delivery of a deed is that the grantor must presently transfer legal control over the deed to the grantee or an independent third party. If the grantor retains a right to change his mind, then control has not been presently transferred. Because of the potential legal problems that may arise in using this type of device in estate planning, it is especially important to obtain legal advice. An alternative planning tool may better meet your needs with less risk of legal challenge.

If a mortgage covers the property to be transferred, the grantor (transferor) should keep in mind that liability for the debt remains unless a release from the lender is obtained.

Estate and Gift Taxes One of the most frequently cited objectives in estate planning is “minimization of estate and gift taxes.” Knowledge of some of the key state and federal estate and gift tax rules can be helpful in evaluating your current situation and in selecting strategies to minimize such taxes.

Federal Estate Taxes

Federal Gross Estate5 The federal estate tax is a tax on all property of a deceased person. The reader should be aware that these provisions are subject to change. The Economic Recovery Act of 1981 made major changes in the estate and gift tax laws. Additional changes were made more recently. The Economic Growth and Tax Relief Reconciliation Act of 2001 imposed complex changes that will be phased in between 2002 and 2009 with outright repeal of Federal estate taxes in 2010. However, the new law specifically provides that it will have no effect on estates of decedents dying after December 31, 2010, and the exemption will be $1,000,000.

The gross estate includes all real and personal property, whether tangible or intangible. These properties include

the following:

• For decedents dying after 12/31/1981, the estate of the first spouse to die will include one-half the value of joint tenancy property, regardless of which spouse furnished the consideration for the property. This rule applies only where the spouses are the only joint tenants.

• All death benefits under life insurance policies on life of decedent owned or controlled by him or payable to his estate and cash values of all life insurance policies owned by him on lives of others.

• Lifetime gifts are no longer included in the gross estate, although the taxable portion will be included in the tax base for estate tax computations.

• Property over which the decedent held a general power of appointment.

• Property given away during life in which the decedent retained some control or a life estate. Revocable trust assets are included because the deceased retained control until death.

The property must be appraised at its fair market value, or if the executor elects, certain qualified property may be appraised at its current use value. Current use values for qualified property and the current market value will be discussed later in this material. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to sell or buy.

Taxing Joint Tenancy Property Generally, the value of all joint tenancy property is included in the estate of the first joint tenant to die, except for the proportion the executor can prove was contributed to its acquisition by the surviving joint tenant and/or as a gift by a third party to the credit of the surviving joint tenant. If the surviving spouse and the decedent were the only joint tenants, only one-half of the value of the joint tenancy property will be included in the estate.6 As result of the marital deduction (page 11), property held jointly by spouses with rights of survivorship does not trigger any estate tax in the estate of the first spouse to die. Technically, only one-half of the jointly held property would be included in the estate, and that one-half would be excluded by the marital deduction. The act similarly applies to tenancies by the entirety.

Current Use Value The executor may elect to value real property devoted to farming or other closely-held business at its “current use”

value rather than market value if certain conditions are met. The conditions are as follows:

1. The adjusted value of the farm or other closely-held business assets (assets minus debt) must comprise at least fifty percent of the decedent’s adjusted gross estate (assets minus debts).

2. At least twenty-five percent of the adjusted value of the gross estate must be qualified farm or other closely-held business real property.

3. The farm or other closely-held business must pass to qualified heirs.

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