By Douglas Cushing
Congress significantly raised the threshold for federal estate taxes at the end of 2010. The new threshold is scheduled to sunset after two years. The minimum number at which an estate is now subject to the federal estate tax is $5 million, through 2012. Most in the estate and financial planning communities expect Congress to extend that amount beyond the end of 2012. It is possible that there will be some form of escalation thereafter, either CPI-based or stairstepped, as was the case in 2001-2009 — assuming that Congress does not act as it did in 2009 to temporarily eliminate the estate tax in 2010.
What did the Oregon Legislature do this last session to ameliorate the Oregon estate tax hit?
Oregon's action was not nearly as dramatic as the federal jump from a $3.5 million to a $5 million exemption. The nonpartisan Oregon Law Commission, with support from members of the Oregon bar, CPAs, and other interested parties, submitted a measure to the 2011 session to increase the Oregon starting point from $1 million to $1.5 million. At that level, Oregon would still have a relatively low threshold, many nearby states having eliminated state estate taxes. The Oregon Legislature, however, backed away at the end of the session when antitax groups organized against the higher rates that would have been imposed on the few large Oregon estates in order to maintain revenue neutrality.
Oregon's estate tax returns slightly more than 1 percent of the state's biannual revenue. In this year's budget debate, the gross dollar figure recovered had to approximate the same level of the prior biennium. That meant the political comparison to Washington's top rates, which remain higher, was more important to our representatives and senators than the threshold. Washington has a $2 million threshold. The Oregon Legislature did eliminate one unusual component of Oregon's prior law, which was tied to the 2001 federal law. That component imposed a dramatically higher rate on the first dollars once an estate exceeded the $1 million figure. Now the Oregon tax truly begins at the bottom, so that for estates of up to $1.95 million there is a smaller amount due than was the case previously. That will be true for decedents who die after January 1, 2012. This date enables the Department of Revenue to avoid the complication of a January 1, 2011 effective date, which would have forced it to address the estates of decedents who had died prior to approval of legislation. Estates with natural resource assets (agriculture or fishing) may benefit from an expanded credit for the tax on figures up to $7.5 million if the value exceeds 50 percent of the estate.
Given the realities of the Oregon law, what planning steps make sense?
Dividing estates between spouses or domestic partners as Oregon law allows, or utilizing credit shelter trusts upon the first death, can enable each estate to obtain at least the $1 million exemption. While the size of the federal exemption now eliminates the need in many instances to be concerned about such divisions of estates, for Oregon purposes that remains an important step to consider. Giving away one's assets to one's heirs actually has an extra Oregon benefit because Oregon does not impose a gift tax. The federal annual exclusion of $13,000 per donee remains available for incremental use as well as for the lifetime federal exclusion. Giving under Oregon's rules is a more effective method of reducing one's ultimate estate tax exposure. Charitable giving, of course, remains a very clear option to avoid any taxes; unlike annual income limits, there are no percentage restrictions on charitable gifts in an estate tax calculation.
Regular review of an estate plan with your legal and financial advisers remains essential. Even with the current economic climate, values in many asset classes are rising. The prospect of an estate tax being payable by a greater percentage of Oregon's residents remains high because life insurance proceeds and retirement accounts will boost many estates over the $1 million level, even if other asset values have declined. The impact can be mitigated, but only by thoughtful planning.