Now that Congress has repealed the estate tax for all or some portion of 2010, Oregon married couples need to rexamine whether or not their estate plan will work as they intended.
For any couple with a net worth over $1 million, it is common to have a tax plan which divides the marital property when the first spouse dies.
These plans typically provide that the portion of the decedent’s estate that is exempt from estate tax will pass to pass to a tax exempt trust, often called the “credit shelter trust” and the balance passes to the surviving spouse or a marital trust. In situations with children from a prior marriage, it is very common for the beneficiaries of the credit shelter trust to include the children from a prior marriage as beneficiaries; whereas, the assets passing to the surviving spouse will not include those children.
For example, if the first spouse died in 2009 with a $5 million estate, $3.5 million would be transferred to the credit shelter trust, because that was the amount that was exempt from federal estate taxes, and the $1.5 balance will be transferred to the surviving spouse or placed in a trust for the benefit of the surviving spouse.
However, if the first spouse dies in 2010, while the repeal is in effect, all of the first spouse’s estate will pass either to the credit shelter trust or to the marital trust, depending on the wording in the estate plan document. If there are children from a prior marriage, it will be important to know how the estate will be split. If all of the decedent’s estate passes to the surviving spouse, then the children’s shares may be significantly reduced. However, if the children are the sole beneficiaries or co-beneficiaries of the credit shelter trust, this could significantly reduce the amount of assets available to the surviving spouse.
Further complicating this issue are the following:
- Oregon’s Inheritance tax exemption of $1 million significantly complicates the trust allocations and the beneficiaries who may inherit trust property.
- The federal income tax carryover basis rule changes apply to 2010 Oregon estates which may cause an unexpected income tax when inherited property is sold.
- 2010 estates over $1.3 million will have to file an informational return with the IRS
Because of the 2010 law changes, every couple with a net worth in excess of $1 million should contact their estate planning attorney to review their current plan to determine how their estate would be handled if a spouse died in 2010 while the federal estate tax is repealed.