News article

Oregon’s Estate Tax and the Federal Estate Tax
By James Bruce
Last Update: April 23, 2013

The Act

The American Taxpayer Relief Act of 2012 (“the Act”) was enacted by Congress on January 2, 2013. The bill addressed the expiration of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, known as the “Bush era tax cuts,” which had been scheduled to expire at the end of 2012.

The Act included several major provisions that may impact how your Federal estate tax will be calculated. One of the most significant changes was an increase in the highest marginal Federal tax rate, from 35% to 39.6%. The unified tax credit, which allows each person to gift a certain amount of their assets tax-free, remains unchanged at $5,250,000. For those with estates exceeding $5,250,000 million, the Federal taxes are only imposed on the excess, not the first $5,250,000. Finally, the gross estate includes all property owned at death, but any lifetime gifts over the (newly increased) $14,000 annual exclusion are also taxed.

Oregon’s estate tax credit remains unchanged at $1,000,000, which means that any Oregon resident whose estate is valued over that amount at the time of death will be subject to estate taxes. The tax begins at 10% of the amount over $1,000,000 and reaches as high as 16% for large estates. This creates a situation where an estate may be subject to Oregon estate tax but will not be subject to Federal estate tax.

The Oregon Estate Tax generate between $90 million and $100 million a year in revenue. This represents approximately 1.5% of the General Fund revenue for the state. Many legislators and business owners have argued for a repeal of the Oregon estate tax, and in the past decade over thirty states with similar laws have elected to eliminate the death tax in their state. However, as the law currently stands, it is important to consider the Oregon estate tax when making your estate planning decisions.

Marital Deduction and Portability.

Married couples are permitted by law to leave any amount of assets to their spouse without incurring any estate taxes. This is known as the “unlimited marital deduction” and exists for both Oregon and Federal estate tax purposes. The rule is simple: any unrestricted assets you leave to your spouse through your estate plan are tax free.

The Federal unified credit is “portable,” meaning a surviving spouse may utilize the deduction left by their deceased spouse even if all of the assets are left to the survivor. Because the current Federal exemption level is $5,250,000, this portability rule effectively brings the Federal estate tax exemption amounts for married couples to $10,500,000.

Unfortunately, Oregon does not share the portability rule. This means that unless certain specific estate planning steps are taken, when the first spouse dies the couple will lose the $1,000,000 Oregon unified credit for that individual. The surviving spouse may only use their own unified credit, but not the unused unified credit of the decedent. The result is that the couple has reduced the maximum allowable tax-free transfer from $2,000,000 to only $1,000,000. This can create a significant tax liability that could easily have been avoided through proper estate planning.

One method to ensure that both unified credits are used is the “Marital Bypass Trust.” This type of trust is established and funded with the unused portion of the $1,000,000 exemption that belonged to the first spouse. The remainder of the estate passes tax-free to the surviving spouse because of the unlimited marital deduction. When the surviving spouse dies, the Marital Bypass Trust allows the couple to use both credits. In addition, the Marital Bypass Trust has the added benefits of avoiding probate, increasing privacy, and reducing the amount of time needed and the overall cost of administration of your estate.

Gifting to Reduce Taxable Estate

Oregon’s estate transfer tax calculation, which does not include lifetime gifts, presents another planning opportunity. For those whose estates are larger than Oregon’s $1,000,000 exemption, but smaller than the Federal $5,250,000 exemption, it is possible to make up to $4,250,000 in gifts that will not result in state or Federal taxes. The $4,250,000 gift is added to the Federal tax calculation, which may nonetheless remain less than $5,000,000, resulting in no Federal tax. Since the $4,250,000 will be removed from the estate for Oregon purposes, there will also be no state estate tax.

The Federal annual gift exclusion has been increased from $13,000 to $14,000. This allows an individual to give up to $14,000 per individual each year without having to pay Federal estate taxes. Correct use of the annual exclusion can efficiently place the assets with the intended recipients and reduce an estate below the Federal taxable level of $5,250,000.

Many of these changes were intended to make the estate tax code easier to understand and implement. Unfortunately the result is often the opposite. With any change comes opportunity. With proper guidance and careful planning, you can eliminate or minimize your estate tax exposure.