How to Reduce Oregon Estate Tax for Married Individuals

Credit Shelter Trusts as a Planning Strategy in Oregon

Oregon’s Estate Tax Overview

Are Oregon Residents Subject to Federal Estate Tax?

How the Estate Is Valued for Estate Tax Purposes.

For estate tax purposes, the value of an estate is generally determined as of the decedent’s date of death. The gross estate includes virtually all property in which the decedent held an ownership interest.

Real property is generally appraised to determine its fair market value. Retirement accounts, brokerage accounts, bank accounts, and other financial assets are valued as of the date of death. Closely held business interests often require formal appraisals. Life insurance death benefits are generally includable in the decedent’s gross estate.

Out-of-state real property is not simply ignored, but it is treated differently when calculating Oregon estate tax. Oregon applies an apportionment calculation that can reduce the Oregon estate tax based on the proportion of the estate that is considered Oregon Property.

Debts, certain administration expenses, charitable gifts, and other allowable deductions may be subtracted from the gross estate in determining the taxable estate.

Credit Shelter Trusts as a Planning Strategy for Married Couples

For married couples, one of the most effective ways to reduce Oregon estate tax is to incorporate an estate tax credit shelter trust into their estate plan and take the necessary steps to fund that trust after the first spouse’s death. These trusts may have different names and can be funded through different formulas or mechanisms. Common terms include “shelter trust,” “bypass trust,” and “disclaimer trust.”

Although the trust funding mechanisms differ, the basic estate tax objective is the same: to make effective use of the first spouse to die’s $1 million Oregon estate tax exemption. Assets passing to a surviving spouse generally qualify for the unlimited marital deduction and are not subject to estate tax at the first spouse’s death. While this can avoid estate tax at the first death, leaving everything to the surviving spouse can result in the deceased spouse’s $1 million Oregon exemption effectively going unused.

A credit shelter trust is designed to preserve the deceased spouse’s exemption while allowing the assets held in the trust to remain available for the surviving spouse’s benefit. At the first spouse’s death, assets up to the Oregon exemption amount may be allocated to the credit shelter trust. If properly structured and administered, those assets (and their future appreciation) are not included in the surviving spouse’s taxable estate, while remaining available for the surviving spouse’s benefit during life. Upon the surviving spouse’s death, the assets remaining in the credit shelter trust can pass to the couple’s beneficiaries free of estate tax.

The surviving spouse can still use their own $1 million Oregon estate tax exemption against assets included in their estate. Therefore, with proper credit shelter trust planning, a married couple can potentially protect approximately $2 million from Oregon estate tax: approximately $1 million through the credit shelter trust established at the first spouse’s death and another $1 million through the surviving spouse’s exemption.

The following example illustrates the potential benefit (numbers are approximate and rounded for illustration).

Example of Potential Estate Tax Savings

Consider a married couple with a combined estate of $3 million, with each spouse effectively owning $1.5 million. This couple wants their estate to ultimately pass equally to their children.

Scenario A: $200,000 Estate Tax Bill

Without estate tax planning, the first spouse dies with an estate of $1.5 million and simply leaves everything to the surviving spouse. There is no estate tax at the first death because gifts to the surviving spouse qualify for the unlimited marital deduction. The surviving spouse now owns the entire $3 million estate. When the surviving spouse later dies, only the surviving spouse’s $1 million Oregon exemption is available, leaving approximately $2 million subject to Oregon estate tax, with an estate tax bill of roughly $200,000.

Scenario B: $100,000 Estate Tax Bill

Now consider the same facts with a credit shelter trust. At the first spouse’s death, with an estate of $1.5 million, $1 million is allocated to a credit shelter trust. The remaining $500,000 passes to the surviving spouse. The surviving spouse’s estate is now $2 million (their original $1.5 million plus the additional $500,000 received from the deceased spouse). There is no estate tax at the first death because the assets allocated into the credit shelter trust did not exceed the Oregon exemption amount and the remaining assets passed to the surviving spouse and qualified for the marital deduction. At the surviving spouse’s death, the $1 million in the estate tax credit shelter trust (plus appreciation) passes to the children. The surviving spouse’s taxable estate of $2 million can shelter $1 million, leaving $1 million subject to Oregon estate tax, with an estate tax bill of roughly $100,000.

Long story short, the credit shelter trust saved approximately $100,000 in estate tax that would otherwise have been paid out of the children’s inheritance.

The Credit Shelter Trust During the Surviving Spouse’s Lifetime

Can the Surviving Spouse Access Assets in the Credit Shelter Trust?

What Does the Surviving Spouse Need to Do to Establish and Maintain a Credit Shelter Trust?

After the death of the first spouse, the surviving spouse should promptly meet with an estate planning attorney to determine what steps are required to establish and fund the credit shelter trust. There are important post-death steps that are sometimes overlooked because the surviving spouse may not know they are required.

There also are ongoing expenses and administrative responsibilities associated with maintaining a credit shelter trust during the surviving spouse’s lifetime. For example, a credit shelter trust has its own taxpayer identification number and may need to file separate annual income tax returns.

Final Thoughts