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NEW OREGON STATE DEATH TAX

July 2002 - By Eden Rose Brown J.D. Attorney and Counsellor at Law

Have you been advised that no state or federal estate taxes will be due when the first spouse dies? Do you think that you will escape estate taxes so long as you die owning less than $1 million; or $3.5 million if you die in 2009? Be aware that the law has drastically changed; Say “Hello” to the new Oregon estate tax.

Last year’s passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) made sweeping changes in federal estate tax law, including changes to the state death tax credit. In the past, Oregon (and other states) received a share of the estate taxes the federal government collected from its residents. This “sponge” or “pickup” tax came in the form of a state death tax credit, and provided Oregon with millions of dollars in federal revenue.

EGTRRA gradually reduces and ultimately repeals this state death tax credit. The reduction and elimination of the state death tax credit is a way the federal government can shift part of the cost of federal estate tax repeal to the states by reducing the death tax revenues it pays to pickup states such as Oregon and Washington. What this means to these states is a loss of billions of dollars in federal revenue; a loss the states will need to replace.

Oregon Reacts

Under its constitution, Oregon cannot be linked to the new tax law unless the legislature votes to do so through a statutory amendment. Therefore, Oregon is not currently linked to EGTRRA, but remains tied to the previous estate tax law enacted in 1997. Under current Oregon law, the state death tax exemption is $600,000 (possibly $700,000, but the 2002 legislature will have to clarify this), even though the federal exemption amount is $1 million and rising. As the federal exclusion amount increases to $3.5 million in 2009, the Oregon amount will remain at $600,000, unless increased by the legislature.

Because state and federal tax laws are no longer linked, Oregonians face significant drafting, administration and taxation issues involving the state death tax, including:

• An Oregon estate tax liability that may exist for estates in excess of $600,000 even though no federal estate tax is due.

• An Oregon estate tax return is not required for decedent’s estates under $1 million, but Oregon estate tax of up to $33,200 may be due if a person died with an estate over $700,000, regardless of whether or not a return was filed.

• An Oregon estate tax return is required for decedent’s estates over $1 million, and Oregon estate tax will be calculated on a percentage of the value of the estate over $600,000.

• Estate plans that use credit-shelter, A-B or Marital/Family trust planning may use funding formulas that unexpectedly cause an Oregon estate tax to be due at death.

What to Do

With the pending uncertainty of the tax exclusion amount and filing requirements, it is vital to contact your estate planning attorney as soon as possible. Married couples should decide whether to (1) amend the funding formula for the credit-shelter trust and link it to the Oregon exemption amount, or (2) leave the funding formula at the federal exclusion amount and be prepared for the possibility of paying an Oregon estate tax after the first spouse dies. There are several approaches your estate planner can take in revising your plan, including disclaimers and discretionary QTIP planning. Make sure your attorney knows the options.

Unmarried Oregonians should review their estate plan to determine whether to take further steps to reduce the value of their estates in order to reduce or eliminate the Oregon estate tax.

Legislature to Determine Oregon Estate Tax

The Oregon Department of Revenue will ask the Oregon legislature at the 2003 session to determine whether to adopt a separate state estate tax structure and to clarify whether it intended the state law to be linked to the new federal tax law or to remain tied to the 1997 law. In the meantime, we will have to wait to see how the Oregon legislature responds.

It would not be surprising, given current budgetary problems, if Oregon keeps some form of state estate tax and ties it to an exclusion amount lower than that allowed by the federal government. If that is the case, be prepared to pay some amount of state death tax, or revise your estate plan to take the lower exclusion amount into account. Given that the current state estate tax rates run between .8 and 16 percent of amounts over $600,000, many Oregonians, after consulting with their advisors, may opt to pay the lower state tax and continue with their original planning.

Bottom line, the law is confusing and uncertain. Consult your advisors often during the next few years to make sure your estate planning stays up-to-date so that you or your heirs don’t get caught with an unexpected tax bill.

BACK

Attorney Eden Rose Brown is dedicated to providing comprehensive, highly personalized estate planning counsel to couples, families, individuals and businesses. She holds the highest standard of scholarship, client service and lawyer accessibility. The Law Office of Eden Rose Brown is located downtown in the Pioneer Trust Building, 117 Commercial St. NE, Salem, OR 97301. 503-581-1800. Eden@EdenRoseBrown.com