«ESTATE PLANNING A Simplified Guide for Oklahoma Farm and Ranch Families Circular E-726 Oklahoma Cooperative Extension Service Division of Agriculture ...»
Transfer of the property at an early age is usually restricted by economic considerations and by the reluctance of parents to part too early with worldly goods. The economic reason is, of course, the most important. In many cases, the parents need all of their property to provide income in later years.
A gift is very easy to make. Land may be given by a deed properly signed, acknowledged, and delivered. Delivery of the deed is very important (see The Deed as Evidence of Ownership section on page 7). Personal property can be given by handing over the property with the apparent intention of making the recipient the present owner. There must be a manual transfer of the property itself or of something symbolic of it. It is best, however, to evidence the intention of the donor by written instrument.
Most gifts are made inter vivos – that is, by a person who may be in no immediate expectation of death. Ownership of property transferred by gift inter vivos vests absolutely and at the time the transfer is made.
A gift made by a donor in expectation that he will die of some immediate threat of death is known as a gift causa mortis. Such a gift is frequently conditional so that if the donor does not die as expected, the transfer of ownership is nullified. The courts generally hold that ownership passes at the time of the gift to the donee, but that it reverts to the donor if he does not die as he expected. That is, the donor can recover the property if he survives the peril that caused him to make a gift causa mortis.
• A gift can be given at any age and provides ownership security for the recipient.
• Knowledge of ownership may encourage development of the property under the guidance of the donor.
• A gift may reduce net income taxes. A younger person may be in a lower tax bracket; thus he would retain more of the earnings from the asset.
• A gift may help to reduce estate taxes by removing assets from the estate and by establishing the value of the assets at the time the gift was made, thus avoiding the effects of inflation.
• Individuals may make gifts of up to $12,000 per recipient per year without any federal gift tax consequence.
• Oklahoma imposes no state gift taxes while state inheritance taxes are imposed on estate transfers above a certain amount.
• Unless the parents have other income, a large gift may work a hardship on them later in life. Loss of purchasing power through inflation should be kept in mind.
• Transfer by gift may result in family disagreements.
• Gifts may be subject to federal gift taxes if larger than $12,000 per recipient per year.
• If assets are declining in value, gift taxes today may be higher than estate taxes would be later.
• In some cases, the donee may not have sufficient maturity to manage the assets wisely.
• If the child is having financial problems and the gift is not sufficiently large to pay the creditors, the creditors may attach the gift property and the family inheritance may be lost.
Transfer by Combined Sale and Gift Sale and gift can sometimes be effectively combined. In fact, if property is sold at a low price, the difference between the market price and the selling price is considered a gift. If the gift is large enough, federal gift taxes will be due.
Reduced purchase price, low interest rates, and easy terms could be considered in the nature of a gift. In some cases, these are designed to offset the child’s contribution to the farm business. Lower than market interest rates may result in unfavorable income tax results. The differences between the rate used and I.R.S. rates may be treated as income to the buyer with no deduction to the seller.
If a combination of sale and gift is used, the agreement should be carefully worded in writing. This may prevent misunderstandings between the farming child and the other children.
Transfer by Co-ownership Some types of co-ownership provide a means of transferring property when one of the owners dies, as well as a way of sharing ownership.
Joint Tenancy Joint tenancy has been a popular way to own property primarily because it is a way to transfer property. It is one way in which two or more people can own real property together. Perhaps the popularity has been due to a large extent to a lack of knowledge of the disadvantages.
The outstanding characteristic of joint tenancy is that when one joint tenant dies, ownership passes to the surviving joint tenant or tenants. Usually it is a husband and wife who are joint tenants, but unrelated persons may be joint tenants.
It is sometimes desirable for married couples to own checking accounts and motor vehicles as joint tenants in order for the surviving spouse to have prompt access to those items during settlement of the estate.
• Fewer court proceedings are needed to clear up the survivor’s rights. Usually less time and costs are involved in proceedings to terminate a joint tenancy than in a probate. The proceedings to terminate joint tenancy between spouses have been reduced even further. The surviving spouse may obtain a merchantable title to real property in joint tenancy with rights of survivorship by filing the following documents with the County Clerk, as provided by Title 58 O.S., Section 912.
1. A certified copy of the death certificate.
2. An affidavit by the surviving joint tenant stating that the decedent named in such certificate is one and the same person as the joint tenant named in a previously recorded document by book and page where recorded.
The document itself satisfies this requirement as to recording information.
3. If property is held in joint tenancy other than only with the spouse, a waiver or release by the Oklahoma Tax Commission of their estate tax lien must also be filed.
• It is easy to create a joint tenancy. Usually executing a deed naming all the parties is necessary, but the courts have been strict in requiring language to show that the grantor intended a joint tenancy and not tenancy-in-common. Use of the words “and/or” alone is insufficient to create a joint tenancy.
• Very few farmers own all property in joint tenancy; therefore, if probate proceedings are required for part of the estate, much of the advantage of simplified legal proceedings is gone.
• Gift and estate taxes may be higher when property is held in joint tenancy than when property is held in one person’s name. For example, if a widowed mother puts her farm in joint tenancy with her son, a gift tax may have to be paid if the value of the child’s half interest is great enough. Then, when one joint tenant dies, the entire value of the farm may be subject to both federal and state estate taxes. However, the value may be reduced by the amount that the executor can prove was furnished by the surviving joint tenant in acquiring the property but contribution to the purchase price is sometimes difficult to prove. This may be costly. The marital deduction avoids this problem in cases where the joint tenants are married to each other. Once parents transfer property to a child in joint tenancy, they cannot change their minds. An individual may change his will at anytime.
• The child could sell his interest to the farm if he so desired.
• The joint tenancy can be severed by a judgment creditor proceeding against the land belonging to the joint tenant against whom he has had judgment.
• A parent holding title to property in joint tenancy with several children might have difficulty in mortgaging the property.
• The right of survivorship may create unfair distributional results. For example, if a widow or widower remarries, places inherited property in joint tenancy with the new spouse, and dies before the new spouse, children may be disinherited. The property would belong to the surviving joint tenant and will eventually go to the surviving joint tenant’s heirs unless the survivor’s will designates otherwise.
• Conflicts may arise between the joint tenants concerning management of the property.
• Large estates held jointly may increase estate taxes compared to most alternatives.
Terminating Joint Tenancies for Estate Planning Purposes. In large estates, with some exceptions, it is usually desirable to avoid joint tenancy with rights of survivorship. Owning property in joint tenancy prevents an individual from using a life estate plan or a marital deduction trust for such specific property. Thus, terminating joint tenancies is a part of the total estate plan for some people. As a result of the unlimited marital deduction, joint tenancies between husband and wife no longer have adverse tax consequences at the death of the first spouse.
A severance of joint tenancy can occur at the election of any co-owner by transferring the interest to another person.
This can be done without the approval of the other co-owners; and if such transfer should be made, the transferee thereof becomes a tenant in common with the other co-owners who may remain joint tenants to each other. Survivorship rights would not then apply to the interest transferred but would continue to apply to interests remaining in joint tenancy.
Tenancy-in-Common A deed creating a tenancy-in-common can be used to pass a portion of the farm to a member of the second generation, without passing ownership of the entire farm to the same individual. Thus a parent could, if so desired, transfer a fractional share of the farm to a child. This arrangement is sometimes used in gift/purchase agreements. In the beginning the parent might transfer a small interest. As the child grows older and becomes more financially able, he may purchase a larger share.
The portion remaining in the parent’s name at death could be divided among immediate members of the family, or left to the child who already owned part of the farm. The parent could include in the will a provision permitting the child owning part of the farm to buyout the other heirs if desired. Such a provision may allow the child to pay a reasonable amount each year over a fixed period of time.
• The surviving owner does not take all, as in joint tenancy. The decedent’s interest passes to his legal heirs or according to his will.
• A small or large fractional share can be owned or conveyed without consent of co-tenants.
• Several persons can own land in unequal undivided shares.
• A tenant-in-common may use a proceeding called partition to have the jointly owned property physically divided or sold so he can receive his share. This right may jeopardize long-range planning by co-owners.
• Common ownership and responsibility may demonstrate the old maxim, “Everybody’s business is nobody’s business,” thus discouraging proper attention and care to farm management and operation. Keeping account of labor and improvements invested in the farm by co-owners may prove to be inconvenient. Some co-owners may be unable to pay or may refuse to pay their share of farm maintenance and improvement costs.
Partnership A partnership may be used to enable the transfer of farm property from one generation to the next. Usually the child obtains an interest in the farm operation by gift or purchase, or by an operating agreement under which he invests part of his income share in either real or personal property, or by both gift and purchase. Later, arrangements can be made to buy a larger part of the parent’s interest. Provision is then made for the child to purchase the remainder of the parent’s interest at the parent’s death when the partnership is dissolved and liquidated. Often this provision is made by a “buy and sell agreement” whereby the partners agree that the parent’s remaining share shall be sold to one child at the parent’s death.
An agreed payment by the purchaser to other potential heirs is made a part of the arrangement. The payments could be made on an installment basis or by using proceeds from life insurance policies.
Transfer by Will: Types and Requirements A will is an instrument used to distribute property upon death. The person who makes the will is called the testator or if a woman, testatrix. Each state has statutes that regulate the making of wills. The following information is, of course, based on Oklahoma law.8 Advantages
• A will leaves full control of the property with the owner until his death, when transfer of property will be made under impartial supervision and approval of the probate court.
• It permits the owner to distribute his property to best fit his particular situation and wants.
• A will can be changed when conditions warrant. (An exception occurs when a contract has been entered into between two testators binding themselves to dispose of their property in a certain manner.)
• The will may direct that the devisees (the persons designated to receive real property by will) or legatees (the beneficiaries to whom personal property is willed) may be excluded from certain benefits under the will if they fail to survive the testator by a given number of days. This provision would avoid double probate upon property that would be held for only a short time by a person dying soon after the death of the testator.
• Power to lease and sell property in the estate may be vested in the executor, making unnecessary a special application to the court for such purposes.
• It permits disinheritance of heirs at law, except a surviving spouse, if testator so chooses, if he does so by proper language.
• The owner may select the executor of the estate and save the cost of a surety bond if he desires by specifying that the executor serve without bond.
• It may offer tax advantages by reducing estate taxes through careful planning, as contrasted with a sale during the owner’s lifetime.
• The testator may name the guardian of his minor children, and although this is only a recommendation to the court, it is usually followed if the court regards the nomination as reasonable for the interests of the children.