Gift and Estate
Tax. The federal government imposes a percentage tax when you give
away your assets while you are alive (Gift Tax) and when you give away
your assets when you die (Estate Tax). The State of Oregon imposes an
inheritance tax..
$13,000 Annual
Gifts. Each year you can give
$13,000 to as many people as you like
and the government does not tax those transfers.
$5,000,000 Gift
Tax Exemption. If you make a gift in any given year that is more
than $12,000 to a single person you have to file a Gift Tax return and
you may owe gift tax. If the total amount of gifts you have made
in your lifetime (not counting the $12,000 gifts) is less than
$5,000,000 you do not owe a gift tax even though you have to file a gift
tax return. If when you file the Gift Tax return you have given more
than $5,000,000 during your lifetime you owe Gift Tax.
All Assets
Counted for the Federal Estate Tax and the Oregon Inheritance Tax. When you die you have to add up
everything you own to see if your estate is large enough that you owe
Federal Estate Tax or Oregon Inheritance Tax. This includes life insurance proceeds even if they are paid
to someone other than your Estate.
Oregon Inheritance Tax. Oregon
taxes estates larger than $1,000,000. Many Oregonians are subject to this tax
and it is an important part of estate planning.
Federal Estate Tax.
The United States taxes estates larger than $5,000,000. Very few estates are
subject to this tax. In previous years the exempt amount was much lower and it
was much more of an issue in estate planning. The law was changed in 2010 under
the 2010 Tax Relief Act which establishes a new (but temporary) federal estate
and gift tax regime for 2011 and 2012. For estate of individual who die in 2011
or 2012, the federal estate tax exemption is %5 million, and the tax rate is
35%. In 2010, the exemption amount may be increased by an inflation adjustment.
Under the new law, unused federal estate tax exemptions of individuals who die
in 2011 or 2012 are "portable," which means they can be passed along to
surviving spouses. This portability rule does not apply to the Oregon
Inheritance Tax.
Stepped Up Basis.
When you calculate your profit when you sell something your basis
is what you subtract from the sales price to determine your profit. Here
is an example. You bought a rental house for $75,000 in 1980 and over
the years have taken a total of $25,000 in depreciation. Your basis is
$50,000. When you sell it for $150,000 you have a
$100,000 gain (sales price of $150,000 less basis of $50,000). You have
to pay capital gains tax on the profit. If you give the rental to your son
during your life he takes the rental with your basis. However, under current if he inherits the
rental from you, his basis is "stepped up" , i.e., up
from your basis to the fair market value at the date of your
death. This is a great deal for him. Say that it's worth
$150,000 at your death. If he sells it right away he doesn't have
any profit (and no tax) because his basis is $150,000.
Marital
Deduction. No matter how big your estate is, if you leave everything
to your spouse, you will not owe Estate Tax. Your estate gets a
deduction in computing the Estate Tax which is unlimited in
amount. If Bill Gates leaves his entire $45,000,000,000 estate to his wife Linda, he
gets a $45,000,000,000 deduction taxable estate would be zero.
Credit
Shelter Trusts. A typical
strategy to reduce or eliminate the Oregon Inheritance Tax involves the use of
credit shelter trusts. Here
is how it works. Most married couples' estate plan provides that the surviving
spouse owns everything. The assets are titled so that the survivor becomes the
sole owner and the will or living trust provides that the surviving spouse
inherits from the deceased spouse. For example, John and Mary own their house
jointly with right of survivorship. Their wills provide that if the spouse
survives the deceased spouse leaves their entire estate to the surviving
spouse. Let's say they own together $2,000,000. John dies first. Mary becomes
the sole owner of $2,000,000. Mary dies two years later. The first $1,000,000 is
excluded from the Oregon Inheritance Tax. Mary's estate is taxed on the additional
$1,000,000.
Here
is how the OLC plan works to reduce tax. John and Mary set up a joint living trust.
The joint trust provides that upon
death of the first spouse that a credit shelter trust is set up and funded up to the
maximum amount allowed by Federal Estate Tax law. The surviving spouse is the trustee of the
credit shelter trust. Although the credit shelter trust spouse is controlled by and
for the benefit of the surviving spouse, it is excluded from the surviving
spouse's estate. The Credit Shelter trust terminates when the surviving spouse
dies.
To
illustrate this consider the following example. Let's use John and Mary only
this time we we will set up and fund a joint living trust containing
$2,000,000. Assuming John dies first, at his death the joint trust will be
divided in half and $1,000,000 will be transferred to a credit shelter trust
with $1,000,000 remaining in the joint trust for Mary's benefit. Mary is the
trustee and the beneficiary of the credit shelter trust. No Oregon
Inheritance Tax is due when the $1,000,000 transfer is made to the credit
shelter trust since the amount transferred is $1,000,000 or less. At Mary's
death the $1,000,000 in the joint trust is transferred to the children
without tax. The credit shelter trust provides that upon Mary's death, the
credit shelter trust terminates and the $1,000,000 in it transfer to the
children free of tax. Thus, $2,000,000 is transferred to the children free
of the Oregon Inheritance Tax.
Under the new Federal Estate Tax law, unused federal estate tax exemptions of
individuals who die in 2011 or 2012 are "portable," which means they can be
passed along to surviving spouses, which means that the credit shelter trust
approach will have less importance if federal estate tax planning than it did in
prior years.