In the estate planning process, most of the time is spent with the objective of reducing Federal Estate Taxes, which are, of course, staggering when compared with the estate taxes applicable to Oklahoma and other states. However, I thought it would be beneficial to mention estate tax planning concerns, from an Oklahoma estate tax vantage, so that this tax will not be overlooked in the planning process.
As with Federal Gift and Estate Taxes, the Oklahoma Estate Taxes do not apply with respect to property which is given by husband to wife, and vice versa. In other words, in Oklahoma, there is an unlimited marital deduction. In addition, Oklahoma has no gift tax.
The Oklahoma estate tax applies with respect to persons who die in Oklahoma, who die elsewhere but are domiciled in Oklahoma, and who die as residents of other states, but own real estate interests in Oklahoma.
The estate tax return itself consists of schedules which list the types of property owned by the decedent – these schedules are similar to, but not identical with, the schedules on the Form 706, the Federal Estate Tax Return. The Oklahoma estate tax forms (and other tax forms) are available at http://www.tax.ok.gov/formsnpubs.html.
Oklahoma does not use the State Tax Credit method of computing estate taxes (Table B, reproduced below), to determine the amount of estate taxes due when property passes to persons other than spouses. Here is how the Oklahoma Estate Taxes are determined: If both husband and wife are deceased, and the decedent owns real estate in Oklahoma, or is domiciled in Oklahoma, the decedent’s estate is subject to the Oklahoma Estate tax. Oklahoma has two tax rate tables, which apply to two categories of heirs. If the heirs of the estate are “lineal heirs”, that is, are in the category of parent-child-grandchild, then the estate is subject to taxation, but lineal heirs are entitled to an additional deduction (an “exemption”). The amount of the deduction is based on the year in which the parent died, as follows: for persons dying before 1999, the lineal heir exemption is $175,000. For persons dying in 1999, the exemption is $275,000. For persons dying in the year 2000, the exemption is $475,000; for persons dying in the year 2001, the exemption is $675,000; for persons dying in the years 2002-2003, the exemption is $700,000; for persons dying in the year 2004, the exemption is $850,000; for persons dying in the year 2005, the exemption is $950000; and for persons dying in the year 2006 and thereafter, the exemption is $1,000,000. See 68 O.S. §809.
To illustrate how this works, assume a single parent died in 1999, and left his son, daughter, and grandson (who survived a deceased child) an estate having a fair market value of $275,000. There would be no Oklahoma estate tax, because the exemption for 1999 equals $275,000 (a return must be filed, even though there is no tax to pay). If the fair market value of the property were $300,000, the taxable estate would be $25,000 ($300,000 less the $275,000 exemption), and the estate tax would be $225. See tax table below, to see how the tax is computed.
In addition to the exemption available for lineal heirs, there are deductions also available, for gifts to charity, expenses of administration, expenses of last illness, and debts of the decedent. But after all of these exemptions and deductions have been claimed, the tax is calculated using the following rate table:
Taxable Estate Equal
to or More Than
|Tax on Amount in Column 1||Rate of Tax on Excess Over Amount in Column 1|
|$ 0||10,000.00||$ 0||0.5%|
Collateral heirs, that is, persons who are not lineal heirs, are entitled to the same deductions as lineal heirs, but are not entitled to receive any exemption. The tax rates applicable to Collateral heirs are as follows:
Taxable Estate Equal
to or More Than
|Tax on Amount in Column 1||Rate of Tax on Excess Over Amount in Column 1|
|$ 0||10,000.00||$ 0||1%|
If decedent left his estate of $100,000 to his niece and nephew, and if there were no other deductions available, the estate tax would be $3,700.
The Oklahoma estate tax return is due nine months after date of death. Surviving spouses sometimes do not file this return, but instead, file an affidavit with the OTC. An estate tax return should be filed, even though there may be no tax to pay. The estate tax lien attaches to all property of the decedent, and until a release is filed of public record, title to the real estate will be clouded.
The estate tax lien lasts for ten years, and if the home is sold within this time period by the surviving spouse (whether title to the home is held in trust or held out of trust), title lawyers will normally be looking for an Order Exempting the Estate from Taxes, or similar tax release, before title to the real estate can be cleared. This tax release is normally filed with the County Clerk, or will filed as part of the probate proceedings (if there are any). This tax release is required to be filed of public record, and should be filed, even if an affidavit of surviving joint tenant has been filed with the County Clerk (an affidavit of surviving joint tenant is routinely filed if real estate was titled between husband and wife, as tenancy by the entireties or joint tenancy with right of survivorship).
There are a couple of other twists in the road that estate planners ought to know about. The first deals with property given to a surviving spouse for life, with the remainder interest going to the children. A similar issue comes about with a QTIP (qualified terminal interest property) trust, which qualifies for the marital deduction. Oklahoma does not recognize QTIP property as such, for purposes of the marital deduction, and QTIP property is taxed in part for Oklahoma estate tax purposes. When a surviving spouse is given a life estate to income, a special calculation must be made, to determine the value of the life estate. The computation is made as follows: Let’s say that $300,000 is left to the surviving spouse, under a QTIP trust (using the Federal estate tax concept), with the remainder interest to go the children. The surviving spouse, for purposes of this illustration, is a 70 year old female. Oklahoma has what is generally regarded as an antiquated means of evaluating a life estate. Regardless of the nature of the property (i.e., non-income producing real estate), the tax commission regards the property as being capable of earning 5% income per year. Thus, the 5% factor is multiplied times $300,000, which yields, for purposes of Oklahoma’s calculation, the sum of $15,000. Oklahoma then has its own actuarial table, which is used to valuate the life expectancy of the surviving spouse. This life expectancy is not made with respect to gender – husbands and wives are assumed to live the same number of years. Under the Oklahoma table, the life expectancy for a 70 year old person is 8.48 years. The annuity rate for that age (using Oklahoma’s table) is 5.98022. Thus, we will multiply the annuity rate times the $15,000 annual income to give us the value of the life estate, which is, $89,703.30. For purposes of the “marital deduction” in Oklahoma, the deductible amount is $89,703.30. If the total value of the decedent’s property is $300,000, then the children will receive a taxable inheritance of $210,296.70 (the value of the estate, $300,000, less the life estate of $89,703.30). If the decedent died in 1998, the children would be entitled to a deduction of $175,000 (which was the applicable exemption for the year 1998); thus the taxable estate would be $35,296.70, and the tax on such gift would be $379.
The other bump in the road comes about when a deduction is taken on the decedent’s Federal estate return for the “State Death Tax Credit.” If the amount of the credit is more than the Oklahoma estate tax, then Oklahoma is permitted to increase its estate taxes, so as to match the amount of the credit.
This situation usually comes about when property is taxed both in Oklahoma and in another state. Let me give you an illustration. The decedent died owning $4.5 million in property. Half of the estate was located in Alaska, half in Oklahoma. Under Alaska law, the estate tax is equal to the state tax credit taken on the Form 706. However, only half the credit is payable to Alaska, since only half of the assets are located in Alaska. Under Oklahoma law, whenever other states (such as Alaska) are given credit towards the Federal Estate Taxes (on the Form 706), Oklahoma is permitted to increase its taxable Oklahoma estate, thereby using, in effect, the tax rates of Table B (which in certain instances will be greater than the Oklahoma estate taxes). In this particular case, because the remaining one-half of the tax credit was higher than the Oklahoma Estate Tax, computed using the tax tables reproduced above, Oklahoma is permitted to increase its taxable estate, to match the taxes available under Table B. See §804 of Title 68. The purpose of this illustration is to alert taxpayers about the possibility of falling under Table B (which may increase Oklahoma estate taxes).
In both instances, it might be advisable to use life insurance, as a cost effective means of providing funds for Oklahoma estate taxes. The children could be the beneficiaries of a “first to die” policy (which would be issued on the joint lives of both mom and dad) – death benefits are paid on the death of the first parent to die (premiums ought to be less than individual policies). Such policies could be owned by the children or placed in an irrevocable life insurance trust, so the insurance proceeds payable on death would not be part of the taxable estate.
In summary, all states have estate taxes or inheritance taxes, and in some instances, a state will have both an inheritance and an estate tax. The majority of the states base their estate taxes on the Federal Table B. Oklahoma does not compute its taxes that way. However, Oklahomans who own real estate in other states should not consider the “lower” Oklahoma estate taxes as always being applicable to their situations, because of 68 O.S. §804, which might cause the Oklahoma taxes to increase, using the Table B method of computation.
© 1999 James H. Beauchamp
 The following information is reproduced from the Form 706. A deduction for state death taxes is permitted, on the Federal Estate Tax return, based on the tax actually paid, or the amount computed using the following worksheet and Table B. For purposes of illustration, assume the Federal taxable estate to be $150,000. The state death tax would then be $400, which would be paid to the states which have adopted legislation which ties in with this procedure. The tax is computed as follows: $150,000, less $60,000, gives an adjusted taxable estate of $90,000. The tax credit is then equal to $400 (see Table B below).
Table B Worksheet
Federal Adjusted Taxable Estate
- Federal taxable estate (from Tax Computation, Form 706, line 3 $_____
- Adjustment $60,000
- Federal adjusted taxable estate. Subtract line 2 from line 1.
Use this amount to compute maximum credit for state for
death taxes in Table B. $______
Computation of Maximum Credit for State Death Taxes
(Based on Federal adjusted taxable estate computed using the worksheet above.)
to or More Than
Credit on Amount
in Column (1)
Rate of Credit on Excess Over Amount in Column (1)
|$ 0||40,000.00||$ 0||None|
 QTIP trusts are normally used to protect the interests of children, as follows: if dad dies first, mom will be given income for life, with the remainder going to the children. The QTIP trust is irrevocable, so if mom remarries, she will still receive income, but the step-dad will not inherit if mom then dies. In such a case, the children from the prior marriage will inherit the remainder of the QTIP trust when mom dies.
 Under Federal law, QTIP property, which normally provides an income life estate for a spouse, remainder to the children, is not subject to estate taxes. QTIP property qualifies for the marital deduction.
 §68-804: In case the tax levied upon the value of the property of the estate in Oklahoma and transfers by Section 801 et seq. of this title is less than the credit allowed by the federal government on estate tax imposed upon the value of the property of the estate in Oklahoma, for state estate and inheritance taxes imposed upon the value of the property of the estate in Oklahoma, pursuant to 26 U.S.C. Section 2011, then, in that event, there shall be levied an additional tax which shall be imposed upon the value of the property of the estate in Oklahoma, as of the date of the determination of the Federal Estate Tax, equal to the difference between such credit and the Oklahoma Estate Tax levied upon the value of the property of the estate in Oklahoma and transfers by this Article. Such credit allowed by the federal government shall be the percentage of such credit which is the percentage which the value of the property of the estate in Oklahoma bears to the total value of the estate of the decedent. Such additional tax to absorb the credit shall be determined, assessed, collected and paid pursuant to the provisions of Section 801 et seq. of this title