OREGON ESTATE TAX PLANNING WITH GIFTS – BE CAREFUL

Oregon’s estate tax only applies to the decedent’s wealth on the date of death. ORS 118.010. And Oregon has no gift tax. Thus, if assets are given away before death, by even one day, the tax is zero. But gifts can backfire. Here’s why.

The recipient of items given away during life succeeds to the same cost basis as the person making the gifts. For example, suppose a parent holds stocks that were purchased many years ago for $10,000, and are worth $100,000 today. If the parent gives them to his children during life, the children will have the same “carryover” cost basis in the stocks as their father (i.e., $10,000), and will pay tax on $90,000 of capital gain when the stocks are sold. IRC §1015. But if the stocks pass to the children at the father’s death under his will, the stocks will have a “stepped up” cost basis equal to fair market value on death. IRC §1014. This means the children can sell the stocks for $100,000 and have no gain or loss.

Oregon’s estate tax rate starts at 10% on the excess over $1,000,000. So the lifetime gift described above (of stock worth $100,000) may save about $10,000 of Oregon estate tax. On the other hand, the children will pay perhaps $20,000 in federal and Oregon income tax on $90,000 of capital gain when the stock is sold. Comparing the two, one sees that the parent has traded $10,000 in Oregon estate tax savings for $20,000 of extra income taxes. Instead of saving taxes, the gift increased the overall tax burden by $10,000.

The analysis for Washington’s estate tax is similar, except that Washington’s estate tax only applies to the excess over $2,000,000, and Washington has no income tax.

The results are much different if the parent gives away “high basis” assets during life. For example, if the parent made cash gifts of $100,000, there would be an Oregon estate tax savings of $10,000 without any extra income taxes at a later date. The key concept is: Give away high basis assets during life, and hold low basis assets until death. Unfortunately, cash is the most precious asset to elderly clients, and the hardest (at least emotionally) to give away.

In summary, one should carefully estimate the additional future income tax burden prior to making lifetime gifts. In many cases, the Oregon estate tax savings is dwarfed by extra income taxes down the road.

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