Oregon’s estate tax applies to estates above $1 million, a more aggressive approach than the federal estate tax, which applies only to much larger estates. With tax rates ranging from 10% to 16%, this estate tax is a key concern when planning an estate if you live in Oregon. Several different approaches can avoid or reduce the state tax bill, but they typically come with trade-offs and restrictions. Understanding all the implications is important for making the best decision. Consult a financial advisor to assess your exposure to Oregon’s estate tax and recommend planning strategies tailored to your situation.
Oregon Estate Tax in Brief
Oregon charges an estate tax ranging from 10% to 16% on estates that are valued at more than $1 million. This state tax applies separately from federal estate taxes, but the federal estate tax exemption is $13.61 million in 2024 for individuals (and double that for couples) affects only a few. The state tax rate goes up progressively based on brackets.
An important Oregon estate tax exemption applies to surviving spouses, who can inherit all assets tax-free. In other cases, the estate may have to pay taxes but, in general, those who inherit the estate don’t have to pay taxes on it if they live in Oregon. Heirs may face inheritance taxes if they reside in a handful of states that tax out-of-state inheritances.
Oregon Estate Tax Strategies
To reduce exposure to Oregon’s estate tax, here are five common moves you can make:
- Make lifetime gifts. You can give any number of individuals up to $18,000 each per year tax-free under both federal and Oregon state law. This reduces your total taxable estate. For a couple, the $18,000 annual exclusion doubles to $36,000, and the annual exclusion adjusts upward each year to account for inflation.
- Use an irrevocable life insurance trust (ILIT). An ILIT lets you keep life insurance death benefits out of your taxable estate. You transfer policies to an irrevocable trust managed by a trustee for beneficiaries. This can work well with lifetime gifting of the trust assets. If you die within three years of the transfer, however, benefits may still face taxation.
- Donate via a charitable trust. Charitable lead trusts let you give some assets to charity while keeping the rest within the family. Charitable giving reduces the taxable value of your estate. This reduces the estate tax and, if your estate falls below the $1-million threshold, can eliminate it in Oregon. Charitable remainder trusts pay you income during life, with the balance going to charity at death, also avoiding taxes.
- Employ a family limited partnership. If you have family businesses, properties or other assets, a family partnership lets you share ownership. This takes a portion out of your taxable estate while letting you retain overall control.
- Use a qualified personal residence trust (QPRT). These estate planning tools let you place your primary or vacation home into an irrevocable trust while still living in the home. This reduces the estate’s taxable value outside of the trust period. After the limited time of the trust expires term, your heirs take over ownership. However, should you die beforehand, the home gets included in estate taxes.
Oregon Estate Tax Example
To get an idea of how managing Oregon estate taxes works, consider a widower with a $5-million estate. He has two adult children to whom he plans to leave equal inheritances. He creates an ILIT, funding it with a $1 million policy and naming his children as beneficiaries. He also places $500,000 into each of two different charitable remainder trusts. The remaining $3 million stays in his personal estate.
Upon his eventual death, the $1-million ILIT passes directly to the children tax-free. Each charitable trust also distributes $500,000 to each child, again avoiding taxation. In total, the children each receive $1.5 million tax-free.
The first $1 million of the remaining $3 million is free of estate tax under the $1-million exemption. For the remaining $2 million of his estate, a 10% tax applies to the first $500,000, and a 10.3% tax is assessed on the remaining $1.5 million. Total tax would be $204,500. Here’s how this looks:
|Taxable Portion of Estate
|Marginal Tax Rate
Without any tax-reduction moves, the $4 million remaining after subtracting the $1-million exemption would incur a $419,500 tax bill:
|Taxable Portion of Estate
|Marginal Tax Rate
While the tax-management strategies don’t completely avoid the estate tax, they reduce it by more than half, saving $215,000.
Estate Tax Strategy Limitations
If you use these techniques to avoid Oregon estate taxes, be aware that they come with trade-offs and limitations. Giving your money away, for instance, means you lose control of it. Trust strategies also often require giving up rights or access.
In certain situations, other taxes may apply. For example, if your heirs live in one of the states that taxes inheritances, they may have to pay taxes to their state on your bequest from Oregon.
Estates of more than $1 million in Oregon also may need to file state tax returns. Requirements vary based on residency, property ownership and other aspects. Failing to file can lead to penalties and interest. An experienced financial advisor can provide guidance.
Oregon’s estate tax applies to estates that that are much too small to have to pay federal estate tax. If you live in Oregon, a number of approaches can let you pass substantially more wealth to heirs free of state taxation. From gifts to trusts and shared partnerships, solutions exist to avoid or reduce this burden. Work with a financial advisor or tax expert to employ the best strategies for your situation, as trade-offs apply in many cases. With the right approach, you can minimize erosion of the nest egg you wish to leave behind.
Estate Planning Tips
- If you’re preparing an estate plan, a financial advisor can walk you through key strategies to help protect your assets. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you just started working on an estate plan, consider using this checklist to make sure you perpare for what you need.
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