Estate Taxation

Estate taxation is an important part of every individual’s estate plan.  As an experienced Portland estate planning law firm, we walk our clients through the fundamentals of estate taxation in Oregon.  In the following paragraphs, you will learn about these fundamentals and we will go through a real-life estate taxation example. 

Levels of Estate Taxation

When an individual passes away and their assets pass to their beneficiaries, there is often a tax that has to be paid on that transfer.  Depending on which Portland estate planning lawyer that you speak with, this tax will be called an “Estate Tax” or sometimes “Death Tax” or “inheritance Tax.”  There are two levels of potential taxation; one at the federal level and another at the state level.  The federal taxation exclusion is $12,920,000, which means that there will be no federal estate tax owed if the deceased’s estate is valued below this amount.  At the state level, Oregon taxes estates that are valued over $1,000,000, which in today’s climate means that quite a few estates are subject to tax upon an individual’s passing. 

It is important to note that there is an “unlimited exclusion” at both the state and federal levels for an estate that passes to an individual’s spouse.  As such, even if an estate is worth $50m, there will be no tax owed by the surviving spouse.  However, it is important to note that when the remaining spouse passes away, their beneficiaries will then owe tax on any amount that exceeds the exemption levels.  Please see below for a handy estate tax chart at both the federal and state level, and remember that the exemption is $12,920,000 for federal and $1,000,000 for state.

Federal

State

Real-Life Estate Tax Planning Scenario

Trusts are a very popular tool for individuals both below and above the estate tax threshold, but have added benefits for those in the latter category.  Let’s take the example of Henry and Whitney, husband and wife, to explore how estate taxation works and how trusts can be an effective tool for families.

Let’s suppose that Henry and Whitney have a combined estate value of $2.5m and have two children, Chris and Clarissa.  This combined estate value is comprised of real estate, IRAs, vehicles and some personal property.  Let’s further assume that each spouse wishes for their entire estate to pass to each other and then when the remaining spouse passes away, that the estate will be equally split between their two children.

Let’s say that Henry passes away, leaving behind his wife and two children.  When Henry passes away, Whitney will not face any tax bill at either the federal or state level because of the unlimited marital exclusion, allowing Henry’s $1,250,000 estate (50% of the combined $2,500,000) to pass tax-free to his wife.  However, taxation arises when Whitney passes away.  When she does pass away, Chris and Clarissa will not face any federal tax bill, but they will have an Oregon estate tax bill.  For an inheritance of $2,500,000, the children will have to pay approximately $150,000 in state inheritance taxes, which is obviously no small amount. 

Let’s say that everything in the above example is exactly the same, except that Henry and Whitney approached an experienced estate planning law firm, such as Thapar Law, to plan their estate.  In such a case, we will use “A/B” or “credit shelter” tax planning that will allow each spouse to use their full individual estate tax exemption.  As such, when Henry passes away, our tax planning will allow Henry’s family to “use up” his $1,000,000 exclusion, leaving only $250,000 of taxable estate to pass to his children.  We will do the same for Whitney, and use up her $1,000,000 exclusion, leaving only $250,000 of taxable estate to pass to her children.  When all is said and done, Chris and Clarissa, by taking advantage of our tax planning, will have a significantly lower tax bill; approximately $50,000.  This has saved the family $100,000 and was well worth the cost of setting up the trust.

To sum it up, estate taxation can play a very large role in properly setting up your trust and an experienced Portland estate planning lawyer will focus on this area and see if it applies to your family’s financial profile.  If you have any other questions about estate tax, please give us a call or send us a message.