Estate Planning JC Hobbs Farm Transition Program April

Estate Planning JC Hobbs Farm Transition Program April 2009 Oklahoma Cooperative Extension Service Division of Agriculture Sciences and Natural Resources Oklahoma State University

Estate Planning – Introduction • A single correct answer does not exist. • No perfect solution exists u. Laws change u. 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!) • 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.

Joint Tenancy – With Rights of Survivorship • 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.

Tenancy by the Entirety • Same concept as Joint Tenancy ownership. • Restricted to husband 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.

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”) • Testamentary Duration 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. Beneficiaries 3. Duration of Trust 4. 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. Uses of trust income and principal 6. Timing of distribution to beneficiaries

LIVING TRUSTS Advantages • • 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.

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.

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

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 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.

Do you still need a will if you have a trust? YES! YOUR REVOCABLE LIVING TRUST should provide a POUR OVER WILL. This is necessary in case there any assets that are inadvertently left out of the 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

Taxing the Estate • Federal Estate Taxes • Oklahoma Estate Taxes • Taxes levied on the estate, not on the recipient of the assets.

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 tenancy A. 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 VALUATION FOR 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 VALUATION FOR 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 = $500 Gas = $300 Valuation = 500 x 48 = $24, 000 300 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 in 2009.

Computing “Current Use” Value Rental Rate - Taxes Current FLB Interest Rates 32. 50 – 2. 50 0. 0775 = = $387. 10 X 200 ac Current Use Value = $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 Credit 2. Marital Deduction 3. Transfers to exempt charitable, religious and similar institutions 4. Claims against estate, administration, funeral, unpaid taxes, etc.

Unified Estate and Gift Tax Schedule 1/ 2/ 2005 $780, 800 $1, 500, 0001/ 47% 2006 $780, 800 $2, 0001/ 46% 2007 2008 $780, 800 $2, 000, 0001/ 45% 2009 $1, 455, 800 $3, 500, 0001/ 45% 2010 Repealed 35%2/ 2011 $345, 000 $1, 000 50% Gift tax unified credit exemption remains at $1, 000 Gift tax rate if we do repeal estate tax

Table 1. Unified Rate Schedule Column A Column B Column C Taxable Amount over Taxable amount not over Tax on amount in column A 0 $10, 000 20, 000 40, 000 60, 000 80, 000 0 $ 1, 800 3, 800 8, 200 13, 000 Column D Rate of tax on excess over amount in column A (Percent) 18 20 22 24 26

Table 1. Unified Rate Schedule Column A Column B Column C Taxable Amount over Taxable amount not over Tax on amount in column A $ 80, 000 100, 000 150, 000 250, 000 500, 000 $100, 000 150, 000 250, 000 500, 000 750, 000 $ 18, 200 23, 800 38, 800 70, 800 155, 800 Column D Rate of tax on excess over amount in column A (Percent) 28 30 32 34 37

Table 1. Unified Rate Schedule Column A Column B Column C Taxable Amount over Taxable amount not over Tax on amount in column A $ 750, 000 1, 250, 000 1, 500, 000 2, 000 $1, 000 1, 250, 000 1, 500, 000 2, 000 … $248, 300 345, 800 448, 300 555, 800 780, 800 Column D Rate of tax on excess over amount in column A (Percent) 39 41 43 44 45

MARITAL DEDUCTION • Marital Gifts or Transfers • Unlimited marital deduction at the Federal level. • Also unlimited in Oklahoma.

Oklahoma Allowable Deduction 1. $3, 000 to lineal and collateral heirs as of 1/1/2009 2. $1, 000 burial lot or crypt 3. $500 monument 4. Debts of the estate, attorneys fees, and others

Oklahoma Estate Tax Exemptions 1998 1999 2000 2001 2002 & 2003 2004 2005 2006 & 2007 2008 2009 2010 & beyond $ 175, 000 275, 000 475, 000 675, 000 700, 000 850, 000 950, 000 1, 000 2, 000 3, 000 repealed

Oklahoma Estate Tax Rates Taxable Estate Equal to or more than $--0— 10, 000 20, 000 40, 000 60, 000 100, 000 250, 000 500, 000 750, 000 1, 000 3, 000 5, 000 10, 000 Taxable Estate Less than $10, 000 20, 000 40, 000 60, 000 100, 000 250, 000 500, 000 750, 000 1, 000 3, 000 5, 000 10, 000 Tax on Amount in Column 1 $--0— 50 150 450 850 1, 850 6, 350 22, 600 40, 100 58, 850 218, 850 388, 850 838, 850 Rate of Tax on Excess Over Amt. In Column 1. 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.

SURVIVING SPOUSE AS EXECUTOR 1. 2. 3. 4. May serve without bond. May give one notice to creditors. Spouse alone may appraise inventory. May prepare tax return.

GIFTS - FEDERAL • New Amounts – After 12/31/09 – $13, 000 per year 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 Wife. Cost Estate Value $ 30, 000 $100, 000 Surviving Spouse’s Basis ½ of Original Cost = ½ of Estate Value = Tax Basis $15, 000 $50, 000 $65, 000 1970 2009

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. 2. 3. 4. 5. Avoid large joint tenancy holdings. Consider use of marital trust or life estate. Consider disclaimer. Consider more balanced estates. 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

STRATEGIES IN SMALL ESTATES 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-date 4. Last surviving spouse should have will.

GENERAL PRINCIPLES AND CONCLUSIONS 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 AND CONCLUSIONS 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).

Conclusions • 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.

What did one casket say to the other? Is that you coffin?

The End Questions & Comments