Oregon Estate Taxes – Planning for State Level Peculiarities

This article is written as part of a series on estate taxes at the state level. If you missed our dive into Washington, Minnesota, or Illinois’ estate taxes, check out those articles as well.

Today, we’re shining the spotlight on Oregon’s estate tax system, which has some peculiar twists.

We’ve all heard the saying, “Nothing in life is certain except death and taxes.” But did they mention estate taxes? Because trust us, that’s a whole other level of certainty! While the federal estate tax gets most of the attention—especially with potential changes looming in 2025—it’s state-level taxes like Oregon’s that can surprise families when they least expect it. So, let’s dig into Oregon’s estate tax and how you can navigate it.

The Oregon Estate Tax – Comparisons to the Federal Estate Tax

Oregon’s estate tax kicks in much lower than the federal tax. In fact, it boasts the lowest exemption threshold in the country at $1,000,000 per person. Compare that to the current federal exemption of $13.6 million (for 2024), and you can see why Oregon residents might be feeling a bit… taxed. If your estate is worth more than $1 million, Oregon starts taking its cut, and unlike the federal exemption, Oregon doesn’t automatically adjust for inflation. To increase the exemption, the legislature needs to step in, and spoiler alert, they haven’t done that in a while.

Oregon has a long history of “death” taxes – starting with an inheritance tax in 1903. In 2001, due to changes at the federal level around the estate tax, Oregon updated its rules and set in place today’s current exemption amount, but it wasn’t until 2012 that the legislature changed the tax from an inheritance tax to an estate tax[1]. If the exemption were, at minimum, adjusted for inflation, it would be $1,771,581 in 2024 dollars. Alas, the legislature has not made this move.

Oregon’s estate tax system has 10 tax brackets, ranging from 10% to 16%. Here’s how it breaks down:

In Oregon, just like at the federal level, one spouse can transfer assets to the surviving spouse without triggering any estate tax complications – this is called the “unlimited marital deduction.”  At the federal level, if one spouse has an excess or unused exemption, the surviving spouse can file for “portability” and combine it with their own. However, Oregon doesn’t allow you to combine exemptions with your spouse. It’s a use-it or lose-it offering. 

Natural Resource and Business Credits: Oregon’s Estate Tax Perks

Oregon offers two notable credits that could help certain estates. The Natural Resource and Commercial Fishing Business Credit covers certain real property used for farming, forestry, or commercial fishing. This credit was signed into law in 2023 and applied only to individuals who passed away after July 1, 2023. 

The Forest Conservation Tax Credit benefits small forestland owners who agree to restrict timber harvesting. The landowner must create a conservation area and harvest restrictions must be put in place for at least 50 years.  These credits can be helpful, but keep in mind that estates can only elect one—sorry, no double-dipping!

Planning Strategies for the Oregon Estate Tax

Ready to cut that Oregon tax bill down to size? Here are a few strategies to consider:

1. Exemption Planning with Trusts

As previously mentioned, the Oregon exemption is not a combinable tax credit, unlike the federal estate tax exemption. This means that for a married couple, the design of their estate plan needs to be different to effectively use each of their potential $1,000,000 exemptions.

For example, say that Fred and Carrie live in Oregon and have all their life.  They have two adult children to whom they want to leave their estate.  Fred and Carrie have worked hard, lived within their means, and made smart investment decisions with their wealth management team.  Their total net worth is $5,000,000, and they’ve been responsible for their estate planning.  Their estate plan leaves all their assets to the surviving spouse at first death and the balance to their children once they’ve both passed.  However, this plan has a hidden danger as it does not include setting up a Credit Shelter Trust at the first spouse’s death. 

One day, Fred passes away.  His estate is administered as planned, and everything continues in Carrie’s name.  Because Fred left everything to his spouse, no estate tax has been triggered in Oregon.  Sometime later, Carrie passes away.  Now is when the tax kicks in.  Because Carrie’s estate is valued at $5,000,000, everything is considered for estate tax purposes.  Her estate would receive a credit against the first $1,000,000 of their estate and then pay taxes on the remaining $4,000,000.  Carrie’s estate would owe $425,000 in taxes.  The remaining $4,575,000 was transferred to their children.

However, with a bit more planning, Fred and Carrie could have significantly reduced the state-level taxes.  The results look different if their plan called for a Credit Shelter Trust to be funded at the first death.  At Fred’s death, $1,000,000 would go into this irrevocable trust for Carrie’s benefit.  Carrie could continue to use the assets as she needed.  This also would reduce Carrie’s net worth to $4,000,000.  Then, at Carrie’s death, her taxable estate would be $3,000,000, resulting in a tax bill of $312,500.  This results in a tax savings of $112,500, and the children would split a total of $4,887,500.  The other benefit to this plan is that any appreciation inside the Credit Shelter Trust will be sheltered from the estate tax going forward.

It’s important to note that careful planning includes being aware of beneficiary designations on accounts.  Beneficiary designations can allow for a smoother transition of assets at death but can also undo any careful threshold planning done in revocable trusts.  Beneficiary designations override anything in a Trust or Will, so even if your plan calls for setting up a Credit Shelter Trust at the first death, the beneficiary-designated assets will not get picked up by that careful planning.

2. Gifting

Good news! Oregon has no gift tax, so you can gift without worrying about state taxes. Remember, the federal gift limits still apply—$18,000 per recipient in 2024. You can even pay providers directly above that for education or medical expenses. If you are considering funding 529 plans, you can fund up to 5 years’ worth of annual exclusion without using any federal exemptions.

Large gifts made within three years of death may still be subject to estate taxes. With careful planning, however, gifting can drastically reduce an estate over time and possibly your tax liability.   

3. Changing Residence

It’s easier said than done, but another option would be to move from Oregon to one of the majority of states that do not have an estate tax. Other than Washington and Hawaii, every state west of the Rockies does not have an estate tax. 

However, leaving the state does not rid you of potential estate tax liability. Oregon generally considers you a state resident for tax purposes if you maintain a permanent residence and spend more than 200 days during a tax year in the state. Still, they will also look at the facts and circumstances around your situation when deciding.

For residents, you pay estate taxes on your whole taxable estate. For non-residents, there is a multi-step process for determining your estate tax liability. You typically see this come up when someone leaves Oregon but continues to own assets in the state. You’d first determine your estate tax liability if you were a resident. You would pro-rate that estate tax liability by the proportion of your gross estate in Oregon to the total value of your estate. For example, take the example of Fred and Carrie from above.  Assume they moved to Idaho before passing but kept a $500,000 cabin in Oregon.  Once they both pass, their estate would calculate their estate tax liability if they were residents – in this case, $425,000.  Then, they would calculate the proportion of their estate that is in Oregon – $500,000 for the cabin out of $5,000,000 total estate or 10% of their total estate.  Finally, they’d multiply $425,000 times that 10% and the resulting $42,500 would be their final Oregon estate tax liability. 

There’s one exception to the above.  Oregon tends to only look at a non-resident individual’s “tangible” assets. Tangible assets typically mean real estate for most people. However, business interests, such as an LLC, are considered “intangible” assets and are excluded from inclusion for Oregon estate taxes. This means a non-resident who owns several rental properties in Oregon can significantly improve their tax situation by holding those assets within an LLC rather than outright.

4. Charitable Giving

Feeling generous? Charitable gifts reduce your estate dollar-for-dollar, whether you give during your lifetime or as a bequest. It’s a win-win strategy that can reduce your estate tax while supporting causes you care about.

5. Life Insurance

Finally, life insurance is another tool for handling estate taxes. If structured properly, life insurance proceeds won’t be included in your estate and can provide liquidity for your heirs to pay any taxes due, ensuring your legacy stays intact.

Oregon Outlook

If you live in Oregon, it’s crucial to think beyond your lifetime regarding estate planning. With the right strategies, you can minimize the state’s involvement in your estate and maximize what’s passed on to your loved ones. While there have been efforts to raise the exemption, nothing has changed yet. So, don’t wait—start planning now!

At Mission Wealth, we monitor Oregon and federal estate tax changes closely. If you have questions or need guidance, contact our advisory team today!

This article is not intended to provide any specific tax or estate planning advice. Advisory services are only offered to clients or prospective clients where Mission Wealth and its representatives are properly licensed or exempt from licensure. Consult a tax professional or attorney for specific advice.

[1] https://olis.oregonlegislature.gov/liz/2020R1/Downloads/CommitteeMeetingDocument/216516