By Douglas Cushing
In December Congress took action to provide a $5 million exemption from federal estate and gift taxes. The federal fix has changed the landscape in this arena for at least two years. The number of people likely to be subject to a federal estate tax is now less than a quarter of 1 percent of the population. But that dynamic does not eliminate the need for the rest of the population to address planning for minor children, modern relationships, grandparents, etc. Significantly, for residents of Oregon, Washington, and a number of other states, state-imposed estate taxes still survive!
The Oregon estate tax currently kicks in at any amount over $1 million. No gift tax is imposed in Oregon. Because a marital deduction is allowed in Oregon, a couple can avoid an Oregon estate tax on the first death, no matter the size of the estate. For most situations, rates can increase to a maximum of 16 percent at $10 million. With the current federal rate of 35 percent, the total estate tax rate can be as much as 50 percent.
Two significant changes are pending in the 2011 legislature. House Bill 2451 and Senate Bill 326 each propose an increase in the tax threshold to $1.5 million as well as creating a true threshold at that level. Currently, anything over $1 million has an immediate tax of $32,000, due to a tie to the 2001 federal law. The proposed new schedule truly starts at 8.6 percent, and to preserve revenue neutrality in this tough budget year, the upper rates have been increased.
One other proposed shift in the pending bills is to eliminate coverage of intangible assets — such as LLC shares of an Oregon entity owned by a nonresident. With the current mobile society, it is unclear that all such interests are reported today, and removing this coverage should actually encourage investments in Oregon.
The estate tax threshold in Washington has been $2 million, set at the federal exemption level of 2008. The Washington legislature is considering a boost in its exemption to $5 million to match the federal level. This will exacerbate the recent split between Oregon and Washington for attracting high net-worth individuals, though states like California and Nevada, which have no estate tax, are also alternatives. Washington's rates are higher than Oregon's at present, so if Washington's budget does lead to defeat of the proposed changes, the two states will be much closer in their ultimate impact.
An individual's estate of more than $5 million, or a couple's estate in excess of $10 million, needs federal estate tax planning. Individuals under that level but above Oregon or Washington thresholds need to consider the state tax, even though state rates are less than the federal rate. In some cases estate taxes may prompt an individual or organization to move to another state. Although there are a variety of factors to consider when making such a choice, estate tax considerations should not be ignored, and it is important to take into account both the federal and state changes when planning for your future.