Compass Newsletter - Articles

What the Feds Giveth, The State Taketh Away
(Or did the Feds really give anything at all?)

by Barbara Jo Smith
Fall 2004

The federal government provided some estate tax relief with the 2001 Taxpayer Relief Act. The 2003 Oregon legislature, however, specifically decided not to follow this new federal law. Oregon now has an inheritance tax which must be calculated separate from the federal estate tax. Oregon inheritance tax may be due on estates with a value less than the federal exemption amount and may be due at the death of the first spouse for some married couples. The federal exemption amount and state filing threshold are set out in the chart below:

Year

Federal Exemption Amount

Oregon Filing Threshold

2004

$1,500,000

$ 850,000

2005

$1,500,000

$ 950,000

2006- 2008

$2,000,000

$1,000,000

2009

$3,500,000

$1,000,000

2010

Unlimited

$1,000,000

2011

$1,000,000

$1,000,000

For many years, Oregon had what is called a "pick up" tax. This pick up tax was exactly equal to the state death tax credit that the federal law allowed against the federal estate tax. Once the Federal estate tax return was completed, the amount of the state death tax credit could be determined. The Oregon inheritance tax would equal the amount of the state death tax credit unless the decedent owned property in another state. This system was very easy to administer.

Because the 2001 Taxpayer Relief Act phased out the state death tax credit, the "pick up" tax system would eventually eliminate all state inheritance tax revenue. In 2004, the federal law allows a credit of just one-quarter the amount that would have been allowed prior to 2001. In 2005, the credit disappears entirely and is changed to a deduction from the gross estate. Thus, even though Congress gave us estate tax relief, they did so in part by taking revenue that would otherwise have been paid to the state. In the last Oregon legislative session, eliminating state tax revenue was not an option.

The new Oregon inheritance tax law keeps the "pick up" tax theory, but uses the federal law as it existed on December 31, 2000 to calculate the state death tax credit.

To figure the tax, the taxpayer must complete a federal estate tax return as it existed in 2000 using the exemption levels in the 2000 law. Based on that return, the state death tax credit is determined and that amount is paid to the state.

The tax rates go from .8% to 16% with 20 separate brackets. Estates below the Oregon filing threshold do not have to file a tax return or pay any tax. If an estate is even $1 over the threshold, the tax is computed on the entire taxable estate. For example, a $1,200,000 taxable estate will have a state inheritance tax of $45,200.

Our main concern is for couples who have marital deduction estate planning which was finished prior to September 2003. The new law may cause Oregon inheritance tax to be due after the death of the first spouse even though the intent of the plan is to postpone any tax until the second death. The way the federal and new Oregon law work togther may require changes in some documents.

It is very important that couples with marital deduction planning have their situation reviewed to determine if any changes are required. Marital deduction planning is also known as tax planning wills or trusts or wills or trust which have "A and B" trusts, "credit shelter" trusts, or "bypass" trusts in them. If you have any concerns about your plan, please contact us.