Bullivant Houser Bailey PC: Oregon Replaces Inheritance Tax with Estate Tax

By Darin Christensen

On June 28, Governor Kitzhaber signed a bill that will replace Oregon's inheritance tax with an estate tax. The estate tax is similar to the former inheritance tax, but has several substantial differences and provides some planning opportunities.

Overview

Oregon's existing inheritance tax is based on the state death tax credit formerly allowed by the federal estate tax as of December 31, 2000. The nature of the state death tax credit results in a very complicated rate structure. Essentially, the tax rate is 0% on the first $1,000,000 in value, 41% on the next $68,000 in value, 6.4% on the next $532,000 in value, and then it gradually increases until the rate is 16% at $10,100,000 in value. A key issue that the bill addresses is that the highest inheritance tax rate is on the smallest taxable estates.

The estate tax that will replace it uses a simpler rate structure with rates starting at 10% on assets above $1,000,000 and gradually increasing to 16% on value in excess of $9,500,000. The effect of these new rates is to decrease taxes on Oregon estates of less than $2,000,000 (by up to $20,000) and increase taxes on larger Oregon estates by up to $35,700. Below is a chart that shows the new rates:

Natural Resources Credit

The new estate tax will expand on the natural resources credit that was available under the inheritance tax. This credit effectively allows the deduction from an Oregon estate of up to $7,500,000 in value of certain farm businesses, forestry businesses, or fishing businesses that make up at least 50% of the adjusted estate value.

Gifts/Filing Obligation

Due to the structure of the inheritance tax, completed lifetime gifts in excess of the annual gift tax exemption only partially reduce Oregon inheritance tax liability. On the other hand, under the estate tax, such gifts completely escape the Oregon estate tax.

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 take an estate below $1,000,000 will eliminate the need to file an Oregon inheritance tax or estate tax return.

Converting to Personal Property

In some cases, citizens of foreign countries or people who are treated as residents of foreign countries can avoid the Oregon estate tax. The bill added an unusual provision which essentially says that Oregon residents are not taxed on intangible personal property (like stocks, money, intellectual property) if any other state or country imposes a death tax on that property. Oregon residents who 1) also are citizens of one of the few non-US countries that impose a death tax on all assets owned by their citizens or 2) are treated as residents of a foreign country (Oregon uses a different test for residency than the test most countries use) that has an estate or similar tax should be able to avoid all Oregon estate tax by making sure all of their tangible property (real estate, vehicles, furniture, and other tangible assets) is owned by a limited liability company or other company. You would want to do this only if doing so does not increase the other tax more than it decreases Oregon tax.

Nonresidents of Oregon who own real estate or tangible personal property in Oregon also can avoid Oregon estate tax by transferring that property to a limited liability company or other company. That would convert the property to intangible property on which nonresidents are not taxed.

Effective Date

The new Oregon estate tax applies to people who die on or after January 1, 2012. People who die before then will be subject to the inheritance tax.

To be certain that your estate plans address the changes in the law, contact Darin Christensen at Bullivant Houser Bailey.

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