On January 1, 2012, the Oregon Estate Tax law became a little simpler to calculate, and the title of the law changed from “Inheritance Tax” to “Estate Tax.” Estates below $2 million now owe less tax than previously due, and estates more than $2 million owe more. Originally, the 2011 legislation raised the Oregon exemption to $1.5 million in an effort to follow, but not match, the federal exemption increase to $5 million. However, in order to maintain revenue neutrality, the exemption increase required the highest marginal tax rate to be raised from the rate of 16% to 19.8%, which was higher than Washington’s top marginal rate of 19%. On May 10, 2011, the Oregon House passed the bill with the higher exemption and the higher rates.
But the rate increase hit a “buzz saw” when the bill was reviewed by the Senate Finance and Revenue Committee. Kevin Mannix, a longtime citizen advocate who served ten years in the Oregon House of Representatives, objected to the rate increase and told the committee that if the bill passed the legislature, it would have completed a “trifecta” (referring to the income tax increases in Measures 66 & 67 that passed last year). He has launched an initiative to repeal the Oregon estate tax.
Tax Fairness Oregon, presenting a different perspective on the issue, also objected to the bill stating that the exemption increase from $1 million to $1.5 million created an unnecessary tax break for the rich. Tax Fairness Oregon recommended keeping the exemption at $1 million. Also, some members of the legislature were opposed to any tax rate increases at all. So the Senate Committee amended the bill to reduce the maximum tax rate back to 16% and keep the exempt-ion to $1 million.
It’s important to note that Oregon and Washington are the only states in the western 13 states that have a state estate tax. Some may ask why Oregon doesn’t follow the majority of western states and simply repeal its estate tax. The revenue from this tax averages approximately $100 million per year, which is less than 2% of Oregon’s total collected revenue. However, the legislature was not willing to replace the lost revenue with another tax.
Since the $1 million exemption remained the same and the top marginal rate stayed the same, what changed?
- Single Rate Table: The new law adopts one tax rate table beginning with a tax rate of 10% for estate values over $1 million with steps up to 16% for estates over $9.5 million. This change replaces the complicated two rate schedules and the add-back tax calculations under prior law.
- True $1 million exemption: Under the old tax system when a tax-able estate exceeded $1 million the tax rate calculations reached back to tax the first $1 million as well. Thus, for estates over $1 million, there was no $1 million exemption. Under the new law there is a true $1 million exemption, and the tax rate calculations begin with the first dollar over $1 million.
- Tax Break for Non-Residents: Prior Oregon tax law is really confusing. It exempted a non-resident decedent’s intangible personal property situated in Oregon only if the state in which the decedent lived exempts intangible personal property of Oregon residents. This complicated tax rule was very difficult to figure out. Also, if a non-resident invests in Oregon real estate through a limited liability company, should the membership interest be exempt from Oregon tax? Or if a non-resident invests in a number of real estate properties in multiple states through a limited liability company, what portion should be exempt from Oregon tax? These issues proved to be too complex to resolve in an equitable manner, so the best practical resolution seemed to be simply to exempt all intangible personal property owned by non-resident decedents from Oregon tax.
As a result, intangible personal property — such as Oregon bank accounts, brokerage accounts, and limited liability company membership interests owned by non-resident decedents — will no longer be subject to Oregon estate tax. However, real property located in Oregon and tangible personal property, such as a recreational vehicle located in Oregon, will continue to be subject to tax.
- Updated Internal Revenue Code Reference Date: Prior Oregon law tied to the federal estate tax law in the Internal Revenue Code (“IRC”) as it existed on December 31, 2000. Very few tax professionals retain copies of the IRC going back that far. So changing to a more current date was necessary, and the new law changed the IRC reference date to December 31, 2010. This change includes the Tax Relief, Unemployment Insurance
Authorization, and Job Creation Act of 2010 (“TRA 2010”) that became law on December 17, 2010.
- Portability For Surviving Spouse In Oregon: TRA 2010 increased the federal estate tax exemption to $5,120,000 in 2012 and added a provision allowing the remaining unused portion of the $5 million exemption of the first deceased spouse to be transferred to the surviving spouse, if both spouses die on or after 1/1/2011 and on or before 12/31/2012. Generally, Oregon tries to synchronize its tax laws with related federal law provisions. However, the Oregon Department of Revenue has indicated that it will not allow the federal portability provisions to apply to Oregon estates.
- Lower Interest Rates for Extended Payment Plans: Due to liquidity issues, some estates need additional time to pay the Oregon estate tax. Under current law the interest rate for an approved Oregon plan, 9% per annum, is considerably higher than the federal rate of 2% per annum for extended payment plans. The new law reduces the interest rate from 9% to 5% per annum. 5% is still higher than the federal interest rate, but at least it’s a step in the right direction. Estates needing additional time to pay the tax can apply for an installment plan up to a maximum 14 years.
- Natural Resource Property: Oregon allows a tax reduction for estates holding natural resource property such as farms, forestland and fishing operations, provided the property continues to be used by family members as discussed below. Significant definitional clarifications were added to the natural resource property statute. For example, natural resource property was expanded to include a cash or cash equivalent operating allowance of up to the lesser of 15% of the claimed natural resource property or $1 million.
Taxpayers who make a natural resource property election will have to continue to report the status of their natural resource property to the Oregon Department of Revenue on an annual basis.
- Continued Natural Resource Use Requirement and Disposition Tax: Family members who inherit natural resource property must continue to use the property for farm, forestry, or fishing business for five out of eight calendar years following the decedent’s death. If natural resource property is sold or its use ceases prior to satisfying the five-out-of-eight-year requirement, a disposition tax will be due six months after the disposition event. However, most, but not all, sales or transfers of natural resource property followed by the replacement with natural resource property continue to qualify and are not subject to the disposition tax.
- Lifetime Gifts: The non-taxability of lifetime gifts has been clarified for Oregon Estate tax purposes. After 2011 Oregon no longer “adds back” lifetime gifts to determine the Oregon Estate Tax (“OETax”).
- 2012 Planning Opportunity: As long as the Federal exemption remains at $5,120,000, there is an opportunity for taxpayers to reduce their OETax exposure without incur-ring Federal gift taxes. For example, if “Joe” dies in 2012 holding assets valued at $2.5 million, his estate would owe approximately $152,500 in OETaxes. But if “Joe” had given away $1.5 million before his death, his OETax would be zero, and his Federal gift tax would be zero. Even though this gifting opportunity is attractive, one must review the income tax basis of the assets prior to making the gift.
If the gifted assets have a low cost basis, the recipient of the gift will acquire the gifted assets at the same low basis as the donor. Later, when the recipient of the gift sells the gifted property, the OETax savings may be exceeded by Oregon and Federal income tax costs.
As long as the federal exemption remains at $5 million many Oregon decedents will never pay federal estate tax, but quite a few will have to pay OETax. With the relatively low exemption of $1 million, many Oregon residents will continue to need to plan for the OETax in their estate plans. The Oregon Department of Revenue is in the process of reviewing its Administrative Rules to determine the revisions that need to be made to comply with the new changes.
As Oregon residents continue to struggle with the economy, some may consider possibility that the OETax will be repealed in the November 2012 election. A spokesperson at Kevin Mannix’s office confirmed that he is working on an initiative for the November 2012 ballot to repeal the Oregon Estate Tax. If that initiative passes, then Oregon may no longer have an estate tax.
Jeff Cheyne was a member of the inheritance tax workgroup of the Oregon Law Commission. He represents individuals and businesses in the areas of estate, tax, business and real estate planning.
Contact Jeff directly at jcheyne@samuelslaw.com
