On September 24, 2003, Governor Kulongoski signed a new law which firmly established an Oregon Inheritance Tax in addition to the Federal Estate Tax. In 2001, the federal law changed federal estate tax laws to increase the federal exemption amount (formerly unified credit) to $3.5 million in 2009, and repealed estate tax and generation skipping tax in 2010. However in 2011, the exemption will once again be $1 million for the federal estate tax.

Oregon’s new law “disconnects” Oregon’s exemption amount and minimum filing requirements from the federal laws. Oregon’s exemption amount no longer matches the federal exemption. Oregon’s exemption amount for 2005 is $950,000 and $1 million in 2006. The chart below summarizes the exemption amount for the Federal and Oregon estate taxes.

Currently, an estate is not required to file a federal estate tax return unless the gross estate is $1.5 million. However, the estate is required to file an Oregon inheritance tax return if the estate is $950,000 or more. The Oregon Inheritance Tax Return requires the same information and documentation as the federal estate tax return.

Why is this important to you? If your gross estate is more than the current Oregon exemption at the time of your death, your heirs will pay Oregon inheritance tax. In addition, if your gross estate is more than the federal exemption at the time of your death, your heirs will also pay federal estate tax. The tax rates for the Oregon Inheritance Tax range from 5.6% to 8.8% for an estate of $950,000 to $3 million.

All wills and trusts should be reviewed to determine if any changes are necessary to avoid the Oregon Inheritance Tax? If you or you and your spouse have a joint gross estate that exceeds Oregon’s current exemption amount, you need tax planning or your heirs will be required to pay Oregon Inheritance Tax. If you currently have a tax planning will or trust, your will or trust may need to be revised because of this new law. Most credit shelter trusts (family trust or bypass trust) allocate the full amount of the federal exemption to the family trust to maximize the exemption and reduce estate taxes. However, if a family trust is maximized at the current federal exemption amount of $1.5 million, then there will be approximately $64,400 owing in Oregon inheritance taxes upon the death of the first spouse. Clients who have estates between $950,000 and $3,000,000 may wish to modify their wills and trusts and provide for disclaimer provisions to be exercised by the surviving spouse. This will maximize flexibility for the surviving spouse who can take a second look at the current estate tax law at the time of death of the first spouse.

In March of 2004, Oregon adopted rules to permit the Oregon inheritance tax to be deferred until the death of the second spouse provided the portion or “gap” between the state and federal exemption qualifies for the marital deduction. The marital deduction is a deduction allowed to an estate for gifts to a spouse. The credit shelter trust can qualify for the marital deduction if the trust provides that the spouse receives all of the income during his or her lifetime and upon the death of the spouse the remainder is distributed to the beneficiaries. Generally, you do not want to take the marital deduction for the credit shelter trust because then it will be included in the surviving spouse’s estate. However, to reduce Oregon inheritance tax, you may want to take the deduction for the gap between the state and federal exemption. We have been modifying our existing wills and trust to permit a portion of the credit shelter trust to be set-aside in a State QTIP trust. We are prepared to review existing estate plans and to revise them as needed to reduce estate and inheritance taxes.

We also recognize that estate planning involves people and their needs—not just tax savings!