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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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for estate taxes after Dec. 31, 2006. See Table 1. An example of a gift tax computation for 2007 is as follows:

–  –  –

Taxable Gifts and Decedent’s Final Estate Taxes Taxable gifts must be taken into consideration in computing a decedent’s final estate taxes. The taxable portion of the gifts is added to the decedent’s taxable estate, the tax computed, and then the unified credit is deducted from the total

estate tax. An example follows:

–  –  –

Other Gift Items Gifts to charitable organizations and other institutions specifically mentioned in the regulations may also be deducted from the gross amount of gifts given (they are nontaxable gifts).

Usually, gifts must be complete and permit present enjoyment to qualify for the exclusions. If the owner retains certain powers or control over property, it may be taxed as a gift and also in the estate at death. In such cases, however, credit may be allowed on the estate tax return for gift taxes paid.

Basis of Property Received Within One Year of Death Normally, the basis of property transferred in an estate is adjusted to its fair market value at the donee’s death. However, the basis of appreciated property acquired by gift within one year of donee’s death is not adjusted to its fair market value at date of donee’s death if it is returned to donor or donor’s spouse. After December 31, 2009, the step-up in basis to fair market value at date of death will be eliminated.

Annual Payment of Gift Tax Gift tax returns are to be filed and gift taxes are to be paid on an annual basis. The due date for filing the return and payment of the tax for gifts made during the year is the next April 15.

Oklahoma Gift Taxes Oklahoma gift taxes have been eliminated for all gifts made since January 1, 1982. No Oklahoma gift taxes have been imposed on gifts between spouses since September 6, 1975.

Oklahoma Estate Tax The estate of any person who dies while a resident of Oklahoma, or a nonresident owning real property in Oklahoma, is subject to Oklahoma Estate Tax Laws. The fair market value of all assets at date of death or the alternative valuation date must be included in the gross estate.

All real or personal property, whether tangible or intangible, belonging to the deceased resident is included in the

estate (see exclusions for spouse, below). The following are also included in determining the gross estate:

• Value of gifts made during three years prior to death, unless proof is furnished that gift was not made in contemplation of death. Credit will be allowed for gift taxes paid if such gifts are included in the estate. The three year contemplation of death provision is still in effect. (Title 68 O.S. Section 807(A)(2))

• Full value of property at date of death for transfers made while living in which the deceased retained some control.

• The full value of property owned in joint tenancy unless proof can be shown that part of the property was acquired through inheritance or moneys of the surviving joint tenant. Property owned with a spouse in joint tenancy is excluded.

• All life insurance policies owned or controlled in any manner by the deceased.

• All property must be valued at the fair cash market value, determined at time of death or six months thereafter. The assessed value for ad valorem taxes does not determine the value for estate taxes.

• Also, the remainder portion of life estates and trusts left to someone other than the surviving spouse will be included in the gross estate.

• Deductions and Exclusions. After the gross value of the estate is determined, certain deductions and exclusions

are allowed, as follows:

• All of a decedent’s property passing to the surviving spouse qualifies for a marital deduction.

• Debts of the deceased person.

• State and Federal income taxes on income of decedent to date of death.

• Special Assessments due that are a lien on taxable property located within this state.

• Funeral expenses, amount expended for last sickness, a monument or marker not exceeding $500, and an amount not exceeding $1,000 for a burial lot or crypt.

• Fees for executors and administrators.

• Costs of administering the estate.

• Transfers or gifts made to charitable, educational, religious, or similar institutions in Oklahoma or similar institutions out of the state where Oklahoma has a reciprocal exemption.

• Value of property received from an estate of a person who died within ten years before, or two years after the decedent. The deduction is computed in the same manner as provided in 2013 of Internal Revenue Code.

This ensures that this property is not taxed twice.

• An exemption for transfers passing to lineal heirs (father, mother, child, child of husband or wife, adopted child of any lineal descendant of decedent) or collateral heirs for deaths occurring after 12/31/06 are shown in Table 3.

Oklahoma Estate Tax Rates The basic purpose of filing an Oklahoma estate tax return is to obtain a release of the estate tax lien on all property owned by the decedent. This is true even though no tax may be due. No estate tax lien is imposed on property transferred to a surviving spouse. The use of an Affidavit of Surviving Spouse or an Affidavit of Lineal Heirs can be used to obtain the release as well for those estates that qualify to use them.





Oklahoma estate taxes are due and payable within nine months after the death of the decedent. A one percent per month interest rate is imposed on delinquent taxes. Estates with a net value of $100 or less are exempt from the payment of estate taxes.

Table 4 may be used for determining Oklahoma estate taxes on the net value of the estate after deductions and exemptions. It is used to determine estate taxes for transfers passing to the father, mother, child, child of spouse, adopted child, or any lineal descendant of decedent or such adopted child. As of January 1, 2007, this table is also used for transfers passing to collateral heirs as well. The rates shown have been effective since 1/1/1982.

Transferring Ownership This section describes some of the methods by which the legal ownership of property may be transferred from one person to another, and describes the various ways in which these methods may be used in estate planning.

Transfer by Contract Sale of the farm to the member of the family who is to take it over is a common method of transfer. The buyer in such cases seldom has enough capital to pay for the farm in a lump sum, and the parents usually need to be assured of some income or return from the farm. This situation may be handled by a sale subject to a mortgage or by one of the several types of conditional sale.

–  –  –

Outright Sale, with Mortgage Use of a deed and a mortgage in combination is a common method of transferring the ownership of real estate between unrelated persons. The seller deeds title to the property to the buyer. The buyer makes a down payment and gives the seller a mortgage on the property to ensure payment of the balance of the purchase price.

Where this method is used in estate planning, the parents may for example deed title of the farm to the child and the child could encumber title by giving a mortgage back to the parents. This method should be encouraged, provided the child can make sufficient down payment. Often the child cannot; and, from the parents’ viewpoint, there are serious disadvantages when little or no down payment is required. Passing the title to a person who might have little incentive to increase equity involves some risk. In this type of situation, some authorities believe the child should pay at least onefourth of the purchase price before the parents pass title. This amount could reasonably vary due to a number of factors.

Advantages

• Outright sale permits the purchasers to make permanent improvements on the land.

• A sale with a mortgage is a businesslike way of making the transfer. It is usually best to have the farm appraised to prevent family misunderstanding as to its value, especially if there is more than one heir.

• Equitable treatment of all the heirs can be separated from the problem of transferring the farm.

• The transfer may prevent the farm from becoming run down when owners become too old to maintain it properly.

• In instances where an estate tax problem exists, sale of the farm will set the value to be included in the estate for estate tax purposes.

• A sale to children makes it possible for the buying children to operate the farm during their most productive years.

Disadvantages

• The parents lose control over the property.

• The capital gains tax may be greater than the estate taxes would be. Selling by the installment sales method can be used to reduce the taxes. Installment sales must conform to certain restrictions.

• The parents may not receive enough for the farm. The parents often are tempted to sell for less than the market price; and, if their wealth is limited, this may later cause them hardships.

• If parents sell to one child for less than market price, conflicts may result with their other children.

• The estate cannot take advantage of current use valuation.

Land Contract (Purchase Contract) The land contract, purchase contract, or contract for deed is recommended as a method of sale when the buyer does not have a sufficient down payment. It is an agreement whereby one party agrees to convey land to another party for a certain price, with the seller retaining legal title and the deed until some specified future date (for example, until all payments are made). Although legal title stays with the seller during the contract, equitable title passes immediately to the buyer. The land contract is becoming popular in several states among unrelated parties.

There are several variations in methods of payment under the land contract. Some are as follows:

• Fixed money price and fixed annual payments.

• Payment based on fixed amount of commodities each year. For example, the contract could specify so many bushels of wheat each year. The value of the payment would then be determined by the price of wheat for that year.

• Fixed purchase price with yearly payment based on percentage of gross receipts. This method is sometimes used on dairy farms.

• Variable purchase price with variable payments. The payments could consist of a certain percentage of the gross income during the parents’ lifetime.

• Combinations and variations of the above may be worked out.

Advantages

• The purchase contract facilitates the purchase of a farm by a young buyer with limited funds. It is one of the few ways this can be done.

• The repayment schedule encourages a young farmer to build up equity during the early years.

• Some sellers like the purchase contract because of income tax savings due to use of the installment plan. Installment payments allow the gain from the sale to be spread over several years.

• An element of control is left in the hands of the seller.

• Ejection of a defaulting buyer under a contract for deed may be easier than a mortgage foreclosure. However, courts often tend to require similar procedures in each case.

Disadvantages

• The buyer has less secure title to the property, since it is an equitable title, but not the legal title.

• It may be more difficult for the buyer to sell his equity if, for health reasons, he wants to quit farming.

• If the down payment is small, the seller takes more credit risk in the early years of the contract than is taken by regular lending agencies that require a larger buyer equity.

Reserving a Life Estate The parents can deed a remainder interest to the child and reserve to themselves a life estate. This is a method of assuring lifetime income for the parents. The child actually owns an interest in the land, but the right to use the land belongs to the parents during their lifetime. The parents, if they so desire, could give a lifetime lease to the child. The property is still subject to estate taxes when the parents have retained a life estate and have deeded a remainder interest to a child but the property is not subject to regular probate.

Advantages

• The child is assured of having the farm and the parents are entitled to income during their lifetime.

• If the parents have no other property, no regular probate proceeding will be necessary to determine fact of death and terminate the life estate. In this procedure, an estate tax return is prepared and a certificate of tax clearance is obtained from the tax commission. The cost of this shorter probate procedure is much less than the cost of a regular probate proceeding.

Disadvantages

• Conflicts regarding management of the property may arise between the life tenants and remaindermen.

• The child could sell his remainder interest to an uncooperative person. The parents could prevent this by inserting a clause in the deed that states, “if the child transferred his rights during the lifetime of either parent, the remainder interest would revert to the parents.”

• It is hard to value what the child is getting.

• The laws are unclear regarding how mineral interests are handled in a life estate.

• Once the life estate is created, parents cannot change their mind about how the property will be distributed at their death. Thus flexibility to handle changing circumstances is cancelled.

• Creditors of the child may be able to reach the child’s remainder interest and if the child has financial difficulties, his inheritance may be lost.

Transfer by Gift Parents in position to do so may, if they wish, transfer property to the younger generation by gift. When the gift is made early in life, the knowledge of ownership usually results in added enthusiasm and energy in developing the property by the donee and learning to care for it under the guidance and advice of the donor.



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