Clients often ask me how their estate plan may be affected by estate taxes. Currently, no Federal Estate Tax is imposed on estates under $11.4 million (per person), affecting approximately 2,000 people (or 0.0006% of the population) in the U.S. Under the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, this exemption amount remains in place, with annual adjustments for inflation, until 2025, at which time it is slated to expire and return to the $5 million exemption amount in place prior to the passage of the TCJA, assuming no new laws are put in place first. While I have no crystal ball, based on what has happened before, we will see a reduction of the exemption amount, but not all the way back down to $5 million.
Oregon (one of 12 states, plus the District of Columbia, with an estate tax separate from the Federal Estate Tax) imposes an estate tax on estates over $1 million. There is no adjustment to the exemption amount, and nothing to suggest that the laws will change any time soon.
Oregon imposes this tax on all estates, regardless of the decedent’s state of residency. If someone dies owning property in Oregon, they will be subject to Oregon’s estate tax laws, although Oregon calculates the estate tax differently for residents and nonresidents.
To explain this, assume the decedent’s total estate is valued at $1,400,000; $280,000 (20%) of the estate is real property situated in Oregon, with the remaining $1,120,000 in another state. If the decedent was a resident of Oregon at the time of their death, $400,000 would be subject to Oregon estate taxes. The starting tax rate is 10%, resulting in a $40,000 Oregon estate Tax.
If the decedent was not a resident of Oregon, the estate tax due is prorated by the percentage of the estate situated in Oregon. Since $280,000 is 20% of the total estate, Oregon levies 20% of what would otherwise be due. The $40,000 tax is reduced to $8,000 (20% of 40,000 = 8,000).
Residency is based on a person’s “domicile” defined as “the place which an individual intends to be their permanent home and to which such individual intends to return whenever absent.” It is not a particularly clear definition and so we look at where one is registered to vote and what state issued one’s driver’s licenses as good indicators.
For couples, revocable trusts can often offer sufficient estate tax planning to avoid most, if not all, estate tax otherwise due at the second spouse’s death (estate taxes are rarely due at the first spouse’s death). Other planning vehicles are available, but they are complex and should not be entered into without great thought and discussion with attorneys, accountants, and financial advisors.
NOTE: For current tax or legal advice, please consult with an accountant or attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.