Oregon Replaces the Inheritance Tax With an Estate Tax

By Rob Le Chevallier
Disclaimer

As of January 1, 2012, Oregon no longer has an inheritance tax but now has an estate tax.  The 2011 legislature made a number of changes to the old inheritance tax law including changing the name to estate tax.

The new estate tax uses a revised rate structure with rates starting at 10% on assets above $1,000,000 and increasing to 16% on value in excess of $9,500,000. Here is a chart that shows the new rates:

Estate Size

Base

Rate on Amounts

At Least

Less than

Tax

Above Minimum

$1,000,000

$1,500,000

$0

10.00%

$1,500,000

$2,500,000

$50,000

10.25%

$2,500,000

$3,500,000

$152,500

10.50%

$3,500,000

$4,500,000

$257,500

11.00%

$4,500,000

$5,500,000

$367,500

11.50%

$5,500,000

$6,500,000

$482,500

12.00%

$6,500,000

$7,500,000

$602,500

13.00%

$7,500,000

$8,500,000

$732,500

14.00%

$8,500,000

$9,500,000

$872,500

15.00%

$9,500,000

$1,022,500

16.00%

 Gifts and Income Taxes

Currently, there is no gift tax payable in Oregon.  The federal annual gift tax exemption is $13,000 and the federal lifetime exemption is $5,000,000.   The federal exemption expires in 2012 and will revert to $1,000,000 unless Congress acts to extend it. Clients may also want to take advantage of this gift tax exemption to eliminate filing an Oregon estate tax return if they are elderly, have sufficient income for their needs, and their estates are close to $1,000,000.

There is no “step-up” in basis for gifts that are made so clients should be aware of the income taxes that would be ultimately paid if the asset is later sold.  The combined federal and state capital gains rate will be higher than the Oregon estate tax rate.  Again, good tax planning is required.

For business and real estate owners, this is a good year to consider making gifts of stock or real estate that are likely to appreciate.  Gifts can also be made to an irrevocable trust for the benefit of children, grandchildren or other family members.

Filing Requirements

An Oregon estate or inheritance tax return is required only if the gross estate of a person exceeds $1,000,000. Pre-death gifts that reduce an estate below $1,000,000 will eliminate the need to file an estate tax return.

Converting Real Estate to Personal Property

Non-residents of Oregon who own real estate or tangible personal property in Oregon can avoid the Oregon estate tax by transferring that property to a limited liability company. Intangible property such as a partnership or limited liability interests are taxed in the state in which the decedent is a resident. There are special rules for foreign nationals who have intangible property in Oregon to avoid double taxation if their country also has an estate tax that taxes their Oregon intangible property.

Consider Establishing Residency in a State with a Higher or No State Estate Tax

Some clients own vacation homes in Palm Springs or Scottsdale.  Currently California is tied to the federal state estate tax credit and no longer requires a return to be filed. Arizona has repealed its estate tax. Washington has a $2 million exemption but the rates over that amount are between 10% and 19%.  If you are a “snowbird” you may want to change your residence to a state with no state estate tax.  Coupled with setting up limited liability companies for your Oregon property, you could reduce or even eliminate the tax.

Natural Resources Credit Revised

The new estate tax also revises the natural resources credit in Oregon. This change now allows deductions from an Oregon estate of up to $7,500,000 in the value of certain farm, forest, or fishing businesses that make up at least 50% of the adjusted estate value.  The natural resource rules are complicated and in order to avoid a recapture of the deduction, clients need good advice.  If you own farmland, timber property, a ranch or fishing property you may be able to take advantage of this increased exemption.

Effective Date

The new Oregon estate tax applies to persons who die on or after January 1, 2012.

 Rob LeChevallier    Buckley Law P.C.  Copyright 2012.