Oregon Adopts New Inheritance Tax
by John Sorlie, estate planning attorney at Bryant, Lovlien & Jarvis, PC

The Oregon legislature recently passed House Bill 3072, which has the effect of creating a state inheritance tax that is separate from the federal estate tax. The estate of a person that dies in Oregon this year (2003) having a value of $700,000 or more will be required to file an Oregon inheritance tax return, and possibly be required to pay Oregon state inheritance tax, even if no federal estate tax return is required to be filed or federal estate tax due.

Prior to the passage of House Bill 3072, Oregon tied its inheritance tax to the federal estate tax. Many states, including Oregon, had what was referred to as a "pick-up tax" which just picked up a portion of the federal estate tax in an amount equivalent to the state inheritance tax credit calculated under the federal estate tax system. The end result was that there was one unified tax system where a portion of any estate tax was paid to the state where the decedent resided or owned property, with the remainder being paid to the federal government.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). One provision of EGTRRA phases out the state inheritance tax credit. As a result, less, and possibly none, of the estate tax will be paid to a state that has a "pick-up tax." The elimination of the state inheritance tax credit has a significant impact on the revenue many states receive from the estate tax. Consequently, many states have chosen to replace the portion of the estate tax previously received under the "pick-up tax" with a separately calculated inheritance tax. Oregon and Washington are two states that have done so.

The result is that certain estates may be obligated to pay Oregon state inheritance tax even if not obligated to file a federal estate tax return or pay federal estate tax. Below is a comparison of the various levels of an estate to which the Oregon inheritance tax or federal estate tax apply:

Value of Estate

Year of Death Federal Oregon

2003 $1,000,000 $700,000
2004 $1,500,000 $850,000
2005 $1,500,000 $950,000
2006 $2,000,000 $1,000,000
2007 $2,000,000 $1,000,000
2008 $2,000,000 $1,000,000
2009 $3,500,000 $1,000,000
2010 $0(estate tax repealed) $1,000,000
2011 $1,000,000 $1,000,000

The Oregon inheritance tax rates start at 4.8% and go up to 16% based on the size of the estate. The federal estate tax rates start at 41% and go up to 49%, although the maximum tax rate will be reduced over the next few years down to 45%. The Oregon inheritance tax will apply to the estates of decedents who were residents of the State of Oregon at the time of their death or decedents that owned property in the State of Oregon.

Because of the creation of an Oregon inheritance tax structure that is different from the federal estate tax structure, many people will want to revise their estate plan. This is particularly important for estates with a value of greater than $700,000. Also, many married couples have wills or trusts drafted in contemplation of a unified federal estate and state inheritance tax system that may need to be updated. For example, many wills or trust create a credit shelter trust upon the death of the first spouse that is funded by the maximum amount that can pass free of the federal estate tax. With the creation of the separate Oregon inheritance tax structure, this may result in the need to pay Oregon inheritance tax when the first spouse dies. To ensure that there will be no unforeseen tax consequences to your estate upon your death, it is advisable to consult with a knowledgeable expert to review your estate plan.