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Navigating the Oregon estate tax: Estate Planning strategies for 2024

July 22, 2024

by Art Werner, JD, MS (Taxation)

Estate planning is a crucial aspect of financial management, especially for residents of Oregon, where state-specific estate taxes can significantly impact the transfer of wealth. Understanding the nuances of the Oregon estate tax and implementing effective estate planning strategies can help mitigate tax liabilities and ensure a smooth transition of assets to beneficiaries. This article discusses the complexities of the Oregon estate tax and offers comprehensive estate planning strategies for 2024.

Understanding the Oregon estate tax - The Oregon estate tax is a state-level tax imposed on the transfer of the estate of a deceased person. Unlike the federal estate tax, which has a much higher exemption threshold, the Oregon estate tax applies to estates valued at $1 million or more. This relatively low exemption threshold means that many estates in Oregon may be subject to state estate taxes, making it essential for residents to engage in proactive estate planning.

Tax Rates and Exemptions - For the 2024 tax year, the Oregon estate tax rates range from 10% to 16%, depending on the value of the estate. The tax is calculated on the portion of the estate that exceeds the $1 million exemption threshold. Here is a breakdown of the tax rates:

  • $1 million to $1.5 million: 10%
  • $1.5 million to $2.5 million: 10.25% to 10.5%
  • $2.5 million to $3.5 million: 11% to 11.5%
  • $3.5 million to $4.5 million: 12% to 12.5%
  • $4.5 million to $5.5 million: 13% to 13.5%
  • $5.5 million to $6.5 million: 14% to 14.5%
  • $6.5 million to $7.5 million: 15% to 15.5% 
  • Over $7.5 million: 16%

Filing Requirements - Estates that meet or exceed the $1 million threshold must file an Oregon Estate Transfer Tax Return (Form OR-706). The return is due nine months after the date of death, although an extension of up to six months can be requested. It is important to note that the extension applies only to the filing deadline, not the payment of the tax.

Estate Planning Strategies for 2024 - Given the relatively low exemption threshold and the progressive tax rates, effective estate planning is essential for Oregon residents. Here are several strategies to consider for minimizing estate tax liabilities and ensuring a smooth transfer of assets.

1. Gifting during lifetime
One of the most effective ways to reduce the size of an estate and minimize estate taxes is through lifetime gifting. By transferring assets to beneficiaries while still alive, individuals can reduce the value of their taxable estate. The federal gift tax exemption for 2024 is $18,000 per recipient per year, meaning individuals can gift up to this amount to any number of recipients without incurring federal gift taxes. Oregon does not have a state gift tax, making this strategy particularly advantageous.

2. Establishing trusts
Trusts are powerful tools for estate planning, offering both tax benefits and control over asset distribution. Several types of trusts can be utilized to minimize estate taxes:

  • Revocable Living Trusts: While these trusts do not provide estate tax benefits, they can help avoid probate and ensure a smooth transfer of assets.
  • Irrevocable Life Insurance Trusts (ILITs): By placing a life insurance policy in an ILIT, the death benefit can be excluded from the taxable estate, reducing estate tax liability.
  • Charitable Remainder Trusts (CRTs): These trusts allow individuals to donate assets to a charity while retaining an income stream for a specified period. The donated assets are removed from the taxable estate, and the donor may receive a charitable deduction.

3. Utilizing the marital deduction
The unlimited marital deduction allows for the transfer of assets between spouses without incurring estate taxes. By taking advantage of this deduction, married couples can defer estate taxes until the death of the surviving spouse. Additionally, the use of a Qualified Terminable Interest Property (QTIP) Trust can provide income to the surviving spouse while preserving the principal for other beneficiaries, such as children from a previous marriage.

4. Portability of the federal estate tax exemption
While Oregon does not have a portability provision for its estate tax, the federal estate tax exemption is portable between spouses. This means that if one spouse does not use their entire federal estate tax exemption, the unused portion can be transferred to the surviving spouse. To take advantage of this, the estate must file a federal estate tax return (Form 706) and elect portability.

5. Valuation discounts
For estates that include interests in closely-held businesses or family limited partnerships, valuation discounts can be applied to reduce the taxable value of these interests. Discounts for lack of marketability and lack of control can significantly lower the estate tax liability. However, it is important to work with a qualified appraiser to ensure that the discounts are properly applied and documented.

6. Annual exclusion gifts
In addition to the federal gift tax exemption, individuals can make annual exclusion gifts to reduce the size of their estate. For 2024, the annual exclusion amount is $18,000 per recipient. By making regular annual exclusion gifts, individuals can transfer significant wealth over time without incurring gift taxes or reducing their lifetime gift tax exemption.

7. Family Limited Partnerships (FLPs)
FLPs are entities that allow family members to pool their assets and manage them as a single entity. By transferring assets to an FLP, individuals can retain control over the assets while reducing the taxable value of their estate. Additionally, FLPs can provide valuation discounts for lack of marketability and lack of control, further reducing estate tax liability.

8. Charitable giving
Charitable giving can be an effective way to reduce estate taxes while supporting causes that are important to the individual. Donations to qualified charitable organizations are deductible from the taxable estate, reducing estate tax liability. In addition to outright gifts, individuals can establish charitable trusts, such as Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs), to achieve both philanthropic and tax planning goals.

9. Life insurance
Life insurance can play a critical role in estate planning by providing liquidity to pay estate taxes and other expenses. By purchasing a life insurance policy and placing it in an Irrevocable Life Insurance Trust (ILIT), the death benefit can be excluded from the taxable estate. This ensures that the proceeds are available to cover estate taxes without increasing the estate’s tax liability.

10. Reviewing and updating estate plans
Estate planning is not a one-time event but an ongoing process. It is essential to regularly review and update estate plans to reflect changes in tax laws, financial circumstances, and family dynamics. Working with an experienced estate planning attorney and financial advisor can help ensure that the estate plan remains effective and aligned with the individual’s goals.

The Oregon estate tax presents unique challenges for residents, given its relatively low exemption threshold and progressive tax rates. However, with proactive estate planning and the implementation of effective strategies, individuals can minimize estate tax liabilities and ensure a smooth transfer of assets to their beneficiaries. By understanding the complexities of the Oregon estate tax and utilizing tools such as lifetime gifting, trusts, and charitable giving, residents can achieve their estate planning goals and preserve their wealth for future generations.

As tax laws and financial circumstances evolve, it is crucial to stay informed and work with qualified professionals to navigate the complexities of estate planning. By doing so, individuals can create a comprehensive estate plan that reflects their values, protects their assets, and provides for their loved ones.

Art Werner, JD, MS (Taxation), is president and shareholder of Werner-Rocca Seminars, Ltd. His lecture topic specialties include business, tax, financial and estate planning for high net worth individuals.