The Oklahoma legislature took a great step forward this past session to offer more liability planning flexibility for Oklahoma’s farmers and ranchers. With the passage of HB 3110, the State of Oklahoma now permits ad valorem tax exemption for livestock owned by closely held entities, but only if the entities are owned only by members of the same family.

First, a little background: The Oklahoma State Constitution provides for the exemption from ad valorem taxation of household goods and livestock employed in the support of a family. Okla. Const. Art. X, Sec. 6(b). A previous Attorney General issued an opinion on this provision that stated “in support of a family” was limited to farmers and/or ranchers that owned the livestock in their individual name or as sole proprietorships. If livestock were owned through a limited liability company, a family partnership or a corporation, the livestock should have been subject to the county’s ad valorem taxes.

The conflict which arises here is that all of the forms of ownership that allowed for exemption from property taxes would subject the farmer or rancher to unlimited liability in the event a lawsuit arose. For example, if a fence went down and cattle were out at night and caused a significant automobile accident, the rancher and his insurance would have to pay all judgments that arose from that accident; even to the point of having to sell land, if the judgment far exceeded liability coverage. Under the previous Attorney General ruling, there was no way to limit the liability to just the cattle unless you wanted to pay ad valorem taxes on the all cattle.
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The new law, which can be found at Title 68 Okla. Stat. §2807.1, approves the use of family limited liability entities, trusts, and estates. The law interprets the clause (in the state Constitution) “in support of the family” to include any entity where a family unit, consisting of common descendents and surviving spouses, (e.g. father/son, siblings, cousins, or widows) to be exempt from ad valorem taxation on livestock if no one outside of the family owns interests. The new law would allow a rancher to separate points of liability, meaning he could own his land in one entity and his cattle in a different entity, without increasing his property tax burden. Using the same scenario of cattle out at night, as above, with proper planning the rancher above might still lose his investment in his cattle, but his land would not have to be sold to cover a judgment over his liability coverage.

The new law goes into effect on January 1, 2013 and would apply to personal property taxes from then forward.