Julia Rice advises clients regarding the estate tax implications of their estate and methods to minimize their federal and state estate tax exposure, including the creation of irrevocable trusts. 

Estate Tax. The estate tax is a tax on your right to transfer property at your death. The fair market value of your gross estate is used to calculate the amount of tax due. A filing of the Federal estate tax is due for estates with combined gross assets and prior taxable gifts exceeding $11,580,000 in 2020. A filing of the Oregon estate tax return is due for estates with combined gross assets exceeding $1,000,000. Given Oregon’s threshold of $1,000,000 versus the federal threshold of $11,580,000, more clients are concerned about the Oregon estate tax than the federal estate tax. Julia prepares federal and state estate and gift tax returns (Forms 706 and 709).  

Marital Deduction. The unlimited marital deduction allows an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from tax. Even though no tax is due, however, an estate tax return must be filed if the filing thresholds are met. 

Traditional Tax Planning versus Flexible Tax Planning. Traditional estate planning typically focused solely on avoiding state and federal estate tax. This made sense given the tax laws at the time. However, the traditional tax formulas used in estate planning documents have caused issues given the current tax climate. 

For instance, planners often used a tax formula that required the full $1,000,000 to be transferred into a bypass trust to avoid state estate tax. Unfortunately, when the surviving spouse passed away, the beneficiaries ended up facing an income tax liability that exceeded what they saved in estate taxes. 

Part of the problem is that Oregon does not have a special capital gains rate. Therefore, the state and federal capital gains rate (combined as high as 29.9%) far exceeds the Oregon estate tax rate (sliding scale of 10-16%). In fact, Oregon has the third highest capital gains rate in the country. 

By placing $1,000,000 of assets into the bypass trust, those assets were ineligible for a step up in basis to the fair market value as of the date of the survivor’s death. As a result, when the beneficiaries sell the assets that were held in the bypass trust, they have to pay capital gains on the difference between the fair market value on the date of the first spouse’s death and sale price. If the assets had not been held in a bypass trust, they would have only paid tax on the difference between the fair market value as of the date of the second spouse’s death and the sale price. 

As you can imagine, this difference can be quite significant if it is a highly appreciated asset. Julia has an advanced degree in taxation (LL.M. Tax), which enables her to properly guide clients through the potential pitfalls in their estate plan while ensuring they build in maximum tax flexibility.