Oklahoma Estate Planning

This category contains posts on trusts, wills, durable powers of attorney, living wills and other issues related to estate planning.

What tax returns are you required to file when someone dies in Oklahoma?

This is a question that comes up from time to time when I am talking with someone who has had a parent or loved one pass away. While the specifics of this question are better answered by a CPA or tax advisor, I can provide some general direction on this question in this post.

The automatic estate

When a person passes away, a new taxpaying entity – the person’s estate – is automatically created to ensure all taxable income is accounted for. Income is taxed either on the taxpayer’s final return, on the return of the beneficiary who acquires the right to receive the income, or if the estate receives $600 or more of income, on the estate’s income tax return.

The chore of filing the taxpayer’s final return usually falls to the executor or administrator of the estate, but if neither is named, a survivor must do it. The return is filed on the same form that would have been used if the taxpayer were still alive, but “deceased” is written after the taxpayer’s name. The filing deadline is April 15 of the year following the taxpayer’s death.

Death tax vs. Income tax

There are three taxes to consider:  Estate (death) taxes and estate income taxes are two different types of tax.  It is very important to understand the distinction between the two types of taxes. Often, there may be no estate tax due while there very well could be some income tax due.  The third type of tax to be considered is the standard income tax that everyone is subject to.

1.  Estate death tax is a tax paid on the transfer of property from the deceased person to the people who receive the deceased person’s property.  As the IRS puts it “[t]he Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.”  To be liable for the federal estate tax, a person passing away in 2014 must have left an estate valued at 5.3 Million or more (and the person had not used up any of this amount during their lifetime). Oklahoma abolished its estate death tax in 2010.  A person passing away in Oklahoma in 2014 would not owe any estate tax under Oklahoma law.

2.  Estate income tax is a tax on the income received by the estate after a person has died (the “estate” is what I referred to above as the “automatic estate” that is created when the person passes away.) Note that this is different than the final individual income tax return which is described below.  Some examples of estate income would be interest, dividends, gains from sales of stock or real estate.  This tax might be paid by the estate or beneficiaries.  Most estates have to pay or file an estate income tax return(s) with the federal and state government.  For the federal government, the executor of the estate (sometimes also referred to as the “fiduciary”) uses the IRS form 1041 to file what is known as a fiduciary income tax return.

3.  Individual Income Tax.  The executor of the estate is required to file a final income tax return for the person who is passed away.   Income earned or received by the deceased person between January 1 and the date of the person’s death is reportable under the person’s Social Security Number.

Are tax returns required?

1.  Final Individual Income Tax Return.     The executor of the estate is required to file a final income tax return for the person who is passed away. Income earned or received by the deceased person between January 1 and the date of the person’s death is reportable under the person’s Social Security Number. If that amount is sufficient to meet the minimum filing requirements (which change each year), you will need to file a return for the person. Also, if the person had any taxes withheld (e.g. from a pension, or from estimated payments), you will certainly want to file to claim a refund. However, if the person’s income was low and she had not been filing returns, you won’t have to unless she had some special circumstance such as selling stock or a house, cashing in an IRA, or winning the lottery.  This is the same return that the person would’ve filed had they not passed away. The final individual income tax return is due on the same day as if the taxpayer had that died. For example, if someone passes away on January 1, 2015, then the final IRS form 1040 will be due on April 15, 2016.

What to do: You can go this page on the IRS website to determine if the person had enough income to require a tax return.

2.  Estate Income Tax.     An estate income tax return is typically required to be filed if the decedent had an income of $600.00 a year or more or had a beneficiary who is a nonresident alien.  In addition to income received while the decedent was living during the tax year, the estate may end up with income through rents on real property received, interest on bank accounts, unpaid salary or dividends.

However, there are some circumstances where if the property is distributed relatively quickly to the people who are to inherit it the estate may not have income and there may not be a need to file an income tax return for the estate. For example, if the person who passed away owned a house in joint tenancy, had transfer on death designations for bank accounts, those assets pass immediately at the time that the person passed away. With the property no longer being owned by the estate, there is no chance for the estate to end up with and come in the form of things like rent received, interest received and things like that. For that reason, those assets very well may not generate income for the estate.

What to do: Determine if the deceased taxpayer’s estate value exceeds the minimum threshold for filing by the IRS and the state taxing authority.

3.  Estate Death Tax.  If you live in Oklahoma and the person passed away in 2014 or later then no Oklahoma state tax return is required because the estate tax was abolished.  For federal tax purposes, if the person passed away in 2014 and the value of their gross estate was less than $5.3 million, no federal estate tax return is required. However, you will want to consult your CPA or tax advisor about this type of issue because there are circumstances where a federal estate and the gift tax return is filed even when no taxes due following a person’s death. Those circumstances are typically when a person is close to the federal exemption number of 5.3 million.

Posted by Shawn Roberts in Oklahoma Estate Planning

Should your automobiles be transferred to your Oklahoma revocable living trust?

It is a good question.

The short answer is “yes,“ automobiles should be transferred to a person’s Oklahoma revocable trust, to receive the full benefits of Oklahoma estate planning. Below is a bit longer explanation:

Purpose of Estate Planning with a Revocable Trust

One of the purposes of doing estate planning with a revocable living trust is allowing a person’s family to avoid Oklahoma probate when the person passes away. The trust helps a person avoid probate because assets that typically force a probate case are owned by the trust when a person passes away (more on that here).

 
For example, if an individual owns real property at the time of his death, titled solely in his name, with no mechanism to pass the title to the property (such as a transfer-on-death deed), the real property is going to have to be probated to change the title to the heirs.
Contrasting that scenario with the revocable trust scenario, upon a person’s death where his revocable trust owns real property, the trust can continue as the owner and eventually transfer title to the property to the beneficiaries. Since a change in title is accomplished by the trust, there is no need to do a probate case based on the real property.

Automobiles and Revocable Trust

Automobiles come up a little bit short in terms of forcing an estate to be probated. There are scenarios where one can change the title to an automobile following a person’s death, by taking the original title to a tag agent and demonstrating that they are the beneficiaries entitled to receive the automobile. This showing of beneficiary status is usually accomplished with a last will and testament. This method is inconsistent and sometimes varies from tag agent to tag agent, so I do not recommend this method to my clients.

Instead, I recommend that my clients transfer title to their automobiles to their revocable living trust by signing the back of the original title at the tag agent. It’s a relatively simple process and allows people to get the full benefit of the revocable living trust.

Posted by Shawn Roberts in Blogposts, Oklahoma Estate Planning, Oklahoma Probate

Oklahoma Probate: Per Capita vs. Per Stirpes

Contrary to what it sounds like, stirpes is NOT something one visits the doctor to have treated.  

However, there are enough questions about the probate terms “per capita” and “per stirpes” to merit this blog post containing an explanation.  These terms describe different methods of sharing a deceased person’s estate when someone below the deceased person in the family tree has died before the decedent.  So, for example, Per Stirpes might be involved if a person, who had three children, passes away, leaving two living children and one child who died before the person who passed away. 

Per Stirpes 

Per Stirpes is a method of dividing an intestate estate where a class or group of distributees take the share which their deceased parent would have been entitled to, had he or she lived, taking thus by their right of representing such ancestor, and not as so many individuals.”** Essentially, Per Stirpes means that the relatives of the deceased person take the share their deceased parent would have taken.

Per Capita

Per Capita is a method of dividing an intestate estate by which an equal share is given to each of a number of persons, all of whom stand in equal degree to the decedent, without reference to their stocks or the right of representation.”**  Essentially, Per Capita means relatives in the same generation each receive the same share of the estate.

**Both definitions are from the Oklahoma Court of Civil Appeals case Matter of Estate of Kinnamon, 1992 OK CIV APP 92, 837 P.2d 927, 928.

Per Capita with Representation

Per Capita with Representation is the method that Oklahoma uses for distribution when a person passed away without leaving a last will and testament.  With this version of per capita distribution, the number of shares is determined by reference to the generation nearest the testator which has at least one surviving person.  The image below shows a per capita with representation distribution, with the number of shares being determined at the grandchild level, since that is the first level where there is a surviving person.


This table summarizes the different distribution methods including per capita with representation, the method use in Oklahoma probate.

 

Posted by Shawn Roberts in Oklahoma Estate Planning

The Oklahoma transfer-on-death deed: Smart Probate Avoidance

What happens to a person’s property when they die in Oklahoma?

There is a detailed answer in this post, What happens to a person’s property when they die?

The shorter answer is that it goes to your relatives, the people you chose in your last will and testament or Oklahoma revocable trust. If you own real property outright and pass away you will need a court order in an Oklahoma probate case to change the title from the person who passed away to his heirs.  There are several ways to avoid this results.  One way is the Oklahoma transfer-on-death deed.

Oklahoma Transfer-on-Death Deed

The Oklahoma TOD allows you to set up your real property to pass to another person after you die.  You sign and record the Deed with the Oklahoma county clerk in the county where the property is located. The person you giving the property to does not become the owner until you pass.  But, when you pass away, . . .

Transfer of the Property after death

The property passes almost automatically, with the person inheriting the property only need to file an affidavit stating that person died, whether the person was married and a legal description of the property.

 

If this is something that interests you or you like to talk about Oklahoma estate planning, please contact me.

 

Posted by Shawn Roberts in Blogposts, Oklahoma Estate Planning, Oklahoma Probate

Who pays the IRS tax on a “gift”?

Tax and money picture

Do you know who pays the tax on gift that is subject to federal estate tax?

In a previous post, I described what the IRS considers to be a gift.
If a gift has been made and there is no exclusion connected to it, gift tax may be due.  However, while a federal gift tax return may be required based on only one gift of $15,000.00, the chances of owing tax on a gift are much more remote.  The gift or gifts would have to exceed the unified credit amount, which currently stands at approximately 5.4 Million Dollars.

Nonetheless, if tax is due to the IRS on a gift, usually the person making the gift pays the tax.

Posted by Shawn Roberts in Estate and Gift Tax, Oklahoma Estate Planning

When is an IRS gift tax return required?

It is important to know when gifts you make trigger your obligation to file a federal gift tax return (IRS Form 709, United States Gift [and Generation-Skipping Transfer] Tax Return).  I have heard the IRS doesn’t take kindly to an individual who fails to file required tax returns 🙂
If a person makes an annual gift or a total annual gift to one person over the annual exclusion, a gift tax return must be filed with the IRS. However, unless the total of the gifts goes beyond the unified credit, 5.4 million, the person will not owe any gift tax.
Posted by Shawn Roberts in Blogposts, Estate and Gift Tax, Oklahoma Estate Planning

What is the IRS annual exclusion?

Every US citizen has what is known as the annual exclusion which allows the person to gift away up to whatever the current year amount is without either having to file an IRS Gift Tax Return or being subject to any tax.
The annual exclusion amount for 2015 is $14,000.00. That means an individual could make as many $14,000 gifts as he desires to different people and not be subject to any tax or have to file a gift tax return.
One of the key points with the annual exclusion is any property gifted under the exclusion does not count against the unified credit. Let me provide an example that may be helpful:
  • A parent gifts the full annual exclusion amount in 2015 to each of their five children. That means the parent gifted $70,000 when all five gifts are added together. Since all of the gifts were within the annual exclusion amount the parent is not required to file a gift tax return.
  • Additionally, the $70,000 does not count against the unified credit, which in 2015 is approximately $5.4 million.
Posted by Shawn Roberts in Estate and Gift Tax, Oklahoma Estate Planning

How are the federal estate tax and gift tax connected?

Connected Hands

Do you know why the federal estate tax and the federal gift tax are often addressed in the same discussion?

Although the federal estate tax and federal gift tax are separate statutes, they are connected by what is known as the unified credit.
The unified credit is automatically provided by the IRS Code to every US citizen at their birth. This credit is the amount of property that a person can gift away before they owe any tax to the IRS.
That means that all the gifts you make during your life are added to all the gifts you make at your death (through an Oklahoma Trust, Oklahoma Will or otherwise) and that is the basic amount that the IRS considers for taxation.
However, before any tax is assessed, you get to subtract (use your “coupon” so to speak) to reduce the amount.  The coupon can be applied to all gifts during life and at death.
So, while a person could use their whole coupon during their life, there is no requirement that they do so.  If there is an amount left on the coupon at death, the amount can be applied.
Posted by Shawn Roberts in Estate and Gift Tax, Oklahoma Estate Planning

What is the federal estate tax?

According to the IRS, the estate tax is a “tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.”  The top federal estate tax rate for property transfers that are not otherwise credited or excluded is 40% for 2015.
Posted by Shawn Roberts in Estate and Gift Tax, Oklahoma Estate Planning

What is that coupon (unified credit) the IRS provides?

Tender Leaf Tea Coupon from Flickr User AVI

Tender Leaf Tea Coupon from Flickr User AVI

Do you know what the Internal Revenue Service and your local grocery store have in common?

They both provide you with coupons you can apply to reduce the amount you required to pay!

Well, the IRS’s “coupon” is not exactly like scoring big with a $2.00 off coupon for Tide Detergent.  The IRS administers the unified credit.

The unified credit is automatically provided by the IRS Code to every US citizen at their birth. This credit is the amount of property that a person can gift away, either during life or at death, before they owe any tax to the IRS.

The coupon analogy is helpful because when a person passes, the person’s heirs can apply the IRS Unified Credit against against tax that might be owed by the deceased person.

For more specifics about the IRS unified credit, check this post, How does the IRS Unified Credit work?

Posted by Shawn Roberts in Estate and Gift Tax, Oklahoma Estate Planning