As you have heard, the Federal Estate Tax exemption was raised to $5 million for tax years 2011 and 2012, and the tax rate is 35%. We don’t know what is going to happen after 2012, but we will keep you posted.

Oregon is another story altogether.  An Oregon Inheritance Tax Return must be filed for anyone owning real and personal property, tangible or intangible, located in Oregon if their total gross estate (both Oregon and Non-Oregon assets) exceeds $1 million. The inheritance tax is based on the percentage of assets located in Oregon.

The $1 million exemption seems ample, but by the time you include your home, life insurance, annuities, and other estate assets, you may exceed the exemption.

For 2011, the first $100,000 after the $1 million exemption is taxed as high as 41%, then the rate drops to 6.4%, and then it rises in several steps back up to 16%. This strange bulge just beyond the $1 million exemption will go away in 2012, at which time the Oregon Department of Revenue will change to a more normal progressive rate that slowly increases between 10% and 16%.

If you exceed the $1 million exemption, there are only three ways to reduce Oregon Inheritance Taxes:

Use special Oregon rules:

1. Natural Resource Credit – This is used primarily for farm, forestry, and fishing businesses.
2. Domestic Partners – a marital deduction is allowed for Registered Domestic Partners as a surviving spouse.
3. Qualified Business Assets – A special deduction is available for Qualified Family Owned Businesses.

Give your property away:

Oregon has an inheritance tax, but no gift tax. Federal taxable gifts before 2012 reduce much of the Oregon tax liability, but not dollar for dollar. Starting in 2012, federal taxable gifts up to the lifetime exclusion will be completely excluded from Oregon taxes.  Completed gifts are not included in the gross estate for inheritance tax purposes, but they also do not receive a step up in basis. Therefore, it wouldn’t make sense giving away appreciated property to save inheritance taxes at 10% while paying combined federal and state capital gains taxes at a higher rate. It does make sense to give away cash.

Move…and take your property with you:

California, Nevada, and Idaho currently do not have estate or inheritance taxes.  Washington has an estate tax, but it has a $2 million exemption (the gross estate includes gifts). It is important to note that these states could institute an estate tax in the future.  Oregon will tax any tangible assets remaining in Oregon.  If you should decide to use this method to avoid the inheritance tax, be sure of a clear “intent” to change domicile by registering to vote, obtaining a drivers license, paying taxes, and actually residing in the new state for the bulk of the year.

Estate and inheritance taxes are very complex, and without proper planning, can be costly. Please call us or your estate planning attorney if you have any questions about the Federal Estate or Oregon Inheritance Taxes.

Filed under: Estate Planning