Oct 31

Successful seminar in Hollis yesterday

We had a successful seminar in Hollis yesterday. All feedback said it was very informative and many people who had already had or started trusts with other attorneys in the area said they understood more after my seminar than they did in all prior meetings with their separate lawyers.

I hope to continue spreading knowledge around on estate planning and hope that it will continue to be well-received.

Oct 30

Values for land and minerals in southwestern Oklahoma

In my last post, I talked about how the IRS must use a fair market value when determing value passed through estate planning or gifting. In this post, I want to just highlight what some of those values are, generally, and give you, as someone interested in estate planning, an idea of how large the IRS actually thinks your estate is so they can tax it.

First, land values: Based on my reviews of land sales here in southwestern Oklahoma, land values vary greatly. We have taken a small hit on the price of range and pasture land, but croplands are rising fairly well, if you are a landowner. Recent trends tend to show that pasture land will bring between $450 and $800 per acre, mainly just for the surface. For cropland that will stay as cropland, the price is usually between $600 and up to $1,500, a lot depending upon production history and location. For cropland that is likely to be split into homesites of 20 acres or less, the price varies between $2,000 and $5,000 per acre (location being the key here). For irrigated cropland, there have not been many recent sales to show a trend, but based on prodcution levels, I would assume that good irrigated land would be worth between $2,000 and $3,500 here in southwestern Oklahoma.

For minerals, there are rules of thumb for valuation. If there is a lease, but no production, then the value is assumed to be 3x the most recent lease bonus. If there is production, then it is generally 5x the yearly oil production or 7x the yearly gas production gross values. If there are no history of leases, then common values accepted by the Oklahoma Tax Commission are $50 per acre for eastern Jackson, western Kiowa, and western Tillman Counties. For western Jackson, most parts of Greer and Harmon Counties, the accepted value is $125 per acre based on surrounding production. For Beckham County, the non-producing value is $250 per acre.

When you add up these values, it is easy to see that even a small landowner (about 500 acres of surface and minerals) could easily pass the $1,000,000 estate tax exemption that will be passed next year. So if you are a landowner, you should contact a qualified estate planning attorney to see how you can ensure your legacy passes to your children and not to Uncle Sam through wealth transfer taxes.

Oct 28

A little about valuations used by the IRS

A lot of my focus with tax and legacy planning is done to ensure that the IRS does not take more of your or your loved ones’ estate than is required by law. Under most IRS tax scenarios, especially the wealth transfer taxes (e.g., the gift tax, the estate tax, and the generation skipping transfer tax), the IRS will base its taxes due on the value you have transferred to the next generation. A majority of the planning done for larger estates will look at ways to lower the determined value, so I want to take this opportunity to help my readers learn how the IRS looks at the value transferred.

First, under Tax Court cases, the standard that the IRS must use for a transferred asset must be “what a willing buyer would pay a willing seller, with both fully informed of all facts related to the transfer.” This is commonly termed as the “fair market value” of the asset. For commonly traded assets (think of public stock, feeder cattle, or other readily marketable commodities), the fair market value can be determined by looking to the markets for the day of the transfer and the value assigned based on the trades for that day. But, the IRS has a hard time proving value on assets where there are no public markets. This brings up one of the most commonly used practices in legacy planning, “discounting”.

Under the court interpretations of discounting, the underlying assets do not fully account for the value of the transferred assets, if there are restrictions placed on the transferred assets. So, if you transfer a minority interest in an asset, the true fair market value is actually less than the fraction of the asset actually transferred. The easiest way to show this is by a simple example, so here goes.

Example: Assume you own 100 acres of land near Altus. We will further assume that this land would sell for about $2,000 per acre based on comparable sales in the area. If you were to transfer this to your (assumed) two children outright, you will have completed a gift of $200,000 and may have to pay gift taxes. However, if you gave your children remainder interests, depending upon your age and health, you would only have transferred about $100,000 in value and would cut your taxes owed in more than half. The same principle would apply with split interests (like adding them as joint tenants) and with placing the land in an LLC and giving them minority interests in the LLC.

You can see that these scenarios can get complicated pretty fast, so if you have a large estate (what the IRS would consider more than $1,000,000) you should contact a qualified estate and tax planning attorney to look at scenarios that will benefit you and your children rather than the tax man. I would like to meet with you and your family to discuss these and other estate planning options for the citizens of Altus and southwestern Oklahoma.

Oct 26

Learning definitions related to estate planning #2

This is a continuation of a previous post that defines terms related to estate planning. Previously, we talked about wills and intestacy. Here we will focus on trusts and powers of attorney.

Terms related to Trusts:

Trust – A contract that a grantor writes that binds the trustee to manage the property in the trust for the benefit of the beneficiaries. Trusts can be revocable, which means they can be changed at any time by the creator, or irrevocable, which means the terms will continue as written and cannot be changed (under most circumstances). Terms such as “living” and “inter vivos” typically describe revocable trusts.

Grantor/Trustor/Settlor – The person who writes the Trust and puts in all of the provisions of the Trust.

Trustee – The person named in the Trust who will be in charge of managing the Trust property and must abide by the written terms in the Trust.

Beneficiary – The persons who get the benefit of the trust property. In a typical revocable trust, the creator occupies all three positions: Grantor, Trustee, and Beneficiary.

Terms related to Powers of Attorney

Power of Attorney – A document that nominates an Agent to act on behalf of a Principal. The power of attorney can be very broad (General) or very narrow (Limited or Special). If you are executing one of these for estate planning purposes, then you should ensure the power of attorney is “Durable”, which means it extends beyond the Principal’s incapacity. The use of a power of attorney can typically negate the need for a guardianship or conservatorship.

Principal – The person who creates the power of attorney and nominates the Agent to act on his behalf. The power of attorney is only valid as long as the Principal is alive. Once the Principal dies, either a probate must be initiated or property must pass by other designation.

Agent – The person nominated to act for the Principal. The Agent is under a duty to act in the best interest of the Principal.

Incapacity – This is a disability that renders the Principal unable to understand the consequences of his own actions. This may be the result of a physical disability, mental degradation, or advanced disease. Most documents equate incapacity with incompetency and disability.

Oct 24

Learning definitions related to estate planning

Here are a few terms that are used in estate planning. I hope these help clarify some of the legal jargon often used, but if you would like to know more, then please call and schedule a complimentary consultation.

Terms related to a Last Will and Testament:

Last Will and Testament – A document that directs a probate court how to distribute any property in an estate of a deceased person. The Will has no effect while the creator is alive. It only gets power once a probate court approves it and authorizes a personal representative.

Testator/Tesatrix – This is the person who created the Will. This term applies while they are alive and after they pass away. (The “tor” or “trix” suffix applies to the masculine or feminine, respectively.)

Executor/Executrix/Personal Representative – This is the person nominated in the Will to be in charge of the probate process. The Executor has the responsibility of paying creditors, finding and managing property, and ulitmately distribution to the persons named as devisees/legatees of the estate.

Devisee – A person named in a Will that will inherit real property like land or minerals.

Legatee – A person named in a Will that will inherit personal property like cash, stock, cars, or household goods.

Heir-at-law -  A person that is related to the testator. The heirs are the people most closely related at the time of death according to state law. For more information, see the Intestate definitions below.

Terms related to Intestate administration

Intestate – This is when a person dies with property, but without a will. Basically the State writes the deceased’s plan for him by setting priorities for an administrator and heirs-at-law.

Administrator – The person who is in charge of the intestate estate. The Administrator has the responsibility of paying creditors, finding and managing property, and ulitmately distribution to the persons named as heirs of the estate. The priority is spouse first, followed by children, grandchildren, parents, siblings, children of siblings, all the way to creditors.

Heirs-at-law – The people who will inherit from the intestate estate. The spouse is considered first, then children. If no children, then parents, siblings, nieces and nephews, and many other relations. If no kin can be found, then property goes to the State.