Asset Protection & Charitable Giving Guide

Step Two: Calculate Possible Federal and Oklahoma Estate Taxes

STEP TWO:

CALCULATE POSSIBLE FEDERAL & OKLAHOMA ESTATE TAXES

No one likes estate taxes! Since the days of James Madison when our forefathers considered outlawing the inheritance of wealth because it went against the American spirit of each person making his or her own money by working, the government has sought to take a taxing advantage of our passage from this world. There are many contrasting views on the subject. Most people feel they should be able to keep what they acquire during their life. This seems to make sense! However, some people argue that without some sort of transfer tax, most small business owners wouldn't have a chance in the open market. The Rockefellers, Kennedys, Wrigleys and the Gates would own everything! How can future generations compete in the computer industry when Bill Gates has a $50 billion head start? What's more, children of the wealthy would have no incentive to be productive since they will eventually inherit their parents' wealth. Finally, what about supporting the cost of running the government? Shouldn't someone who has amassed a larger fortune than they will ever use provide part of it to run our schools, infrastructure, etc.? If all of the money ends up with a privileged few, what about the rest of us? Whether you agree or disagree with the tax, it exists and is a fact of life. In 2001, the United States Congress passed the Economic Growth and Tax Relief Reconciliation Act. The Act is designed to phase out the federal estate tax by 2010. However, even in 2009 the maximum estate tax is still 45%! How many of you will pass away before 2010? Also, as stated below, the tax may be permanently repealed. Since you cannot say when you will die and since none of us can predict what Congress will do, your estate plan still must involve a careful consideration of estate tax issues.

Both the State of Oklahoma and the federal government assess an estate tax to be paid on the value of an estate. There are certain exemptions from those taxes. The most common exemptions are as follows:

Marital Exemption. All property passing to your spouse at the time of your death is exempt from both federal and state estate taxes. As an example, if you had a $2 million estate and left it all to your spouse (or if you and your spouse owned all of the estate property in joint tenancy) it would all pass free of federal and state estate taxes. Although this sounds wonderful, the drawback to using the unlimited marital deduction is that other exemptions are lost.

Federal Exemption. Prior to January 1, 1998, the laws of the United States granted to each person a tax credit against the federal estate tax of $192,800.00. This translated into an exemption of $600,000.00 of property. In other words, if the total value of your estate at the time of death was less than $600,000.00, you would pay no federal estate tax. As a result of the Taxpayer Relief Act of 1997 and the Economic Growth and Tax Relief Reconciliation Act of 2001, that tax credit, now referred to as "the applicable exclusion amount", is increased between 1998 and 2009 as follows:

The tax is supposed to be fully repealed effective January 1, 2010. However, the estate tax relief provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 is supposed to automatically expire January 1, 2011, unless further action is taken by Congress. What this means is that, as of January 1, 2011, we are back to the same tax structure and exemptions we have in 2001!

Oklahoma Exemption. The laws of the State of Oklahoma grant to each person an exemption of $700,000.00 as to property passing to lineal heirs (i.e., father, mother, child, child of husband or wife, adopted child or any lineal descendant of decedent or of such adopted child). The exemption does not apply to collateral heirs (i.e., brothers, sisters, nieces, nephews, other relatives, friends, etc.). For qualifying decedents, there is an additional exemption for a qualifying family farm or family business. In 1998, the Oklahoma Legislature enacted laws that will gradually increase the Oklahoma estate tax exemption to equal the federal exemption. The exemption amount is designed to increase between 1999 and 2006 as follows:

NOTE: The phase-in of the higher Oklahoma lineal heir exemption is different than the phase-in of the federal exemption. Therefore, it is possible that your estate may avoid federal estate taxes but have to pay the Oklahoma tax.

Charitable Exemption. All property passing to a federally qualified charitable entity (i.e., church, college, hospital, etc.) is exempt from both federal and state estate taxes.

FEDERAL ESTATE TAX

OKLAHOMA TAX (FOR LINEAL HEIRS)

OKLAHOMA TAX (FOR COLLATERAL HEIRS)

NOTE: If estate taxes apply to both lineal and collateral heirs, determine the tax separately for each. The total of the two amounts is the total estate tax.

ALL ESTATE TAXES MUST BE PAID IN FULL WITHIN NINE MONTHS AFTER DEATH!

For your convenience, we offer to prepare for you an estate planning projection to show you how your estate might grow in the future and what your potential estate taxes and costs of administration might be. In order to prepare this projection, we need for you to complete the above information as fully as possible.

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