HB 2541 has been submitted to Oregon’s House of Representatives and, if passed, will result in significant changes to the Oregon Inheritance Tax – in fact, even the name will need to be changed to the Oregon Estate Tax. Currently, estates for decedents residing in Oregon at the time of their death or nonresident decedents that owned real property or tangible personal property located in Oregon at the time of their death must pay Oregon Inheritance Tax if the estate is valued at over $1.0 million.
The amount of the tax is based on a complicated formula that incorporates pre-2001 federal estate tax laws to determine the amount of tax that an estate with a net value over $1.0 million owes. Estates that have natural resource property (for example: family farms, ranches or property with timber) receive a credit that reduces the estate tax owed dollar for dollar.
HB 2541 would replace the inheritance tax that is imposed based on pre-2001 federal tax laws with a true estate tax that is imposed based on the decedent’s Oregon taxable estate. The house bill incorporates 2009 federal estate tax laws, except for the exemption amount of $3.5 million.
The house bill increases the current state tax exemption level by $500,000.00 to $1.5 million. This means that estates with a net value under $1.5 million will not owe any state or federal estate taxes. The house bill also has a schedule of tax rates setting the lowest tax rate at 8.6 percent for estates between $1.5 million and $2.5 million up to 19.6 percent for estates over $16.5 million. This eliminates the problem that currently exists where an estate’s first $90,000.00 over a $1.0 million is taxed at a 41 percent rate.
In addition the house bill clarifies the state law elections such as the special marital property election and replaces the natural resource property tax credit with a deduction. The change to the natural resource credit may be significant for estates that have natural resource property since, as a credit, it had the potential to eliminate state inheritance taxes, whereas now it will probably merely reduce the overall estate tax; unless the natural resource property is the only asset of the estate.
Even with the passage of this bill a large chasm will still exist between federal taxable estates and state taxable estates since the federal exemption currently is $5.0 million for individuals. Additionally, the house bill is not tied to current federal estate tax laws, rather it’s tied to the federal laws as they existed in 2009. Consequently, estates greater than or approaching $1.5 million still need tax planning to reduce or eliminate Oregon estate tax liability.
A follow up blog post has been written about the above. You can read more about it here.