Estate Planning Advisor Making a Gift May Be Easy, But Is It the - PDF document

miller nash llp | Fall 2011 brought to you by the trusts & estates practice team Estate Planning Advisor Making a Gift May Be Easy, But Is It the Best Course? So what is the downside of making the recipient of the gift, you need to substantial gifts? weigh the capital gains cost against the likelihood of estate tax payable on In order for a gift to be effective by R. Thomas Olson the donor’s estate if the asset remains in removing the assets transferred tom.olson@millernash.com in the donor’s inventory at the time of from the donors’ estates, it must be 206.777.7413 death. For example, had you acquired a “completed gift.” This means that Amazon.com at its initial public offer- The current tax climate in Wash- there can be no strings attached. For ing, your cost basis would have been ington, D.C., Washington, and Oregon example, were I to give my home to my diluted down to next to nothing as a makes gifts to children and others very child, but retain the right to live in the result of stock splits, and a sale would attractive on their face. The federal house, it would not be a completed gift be nearly 100 percent capital gain, but government excludes the first $5 mil- for estate tax purposes because of the if the stock were transferred through lion of transfers from gift tax. Neither retained interest in the house. (There the donor’s estate, the new basis in the Oregon nor Washington has a gift tax. is, however, a statutory provision that hands of the recipient would be the Assuming that one has made no prior allows a grantor to make a completed market value on the date of death. taxable gifts, a gift plan would allow the gift of a house while retaining the right transfer of up to $5 million free of all to live in the house through use of a Second, although one can hope taxation, or $10 million for a husband “Qualified Personal Residence Trust.” never to be faced with this situation, and wife. “QPRTs,” as they are known, will be the the gift of property can disqualify the subject of another article in this series.) donor from eligibility for need-based There are a number of significant support such as Medicaid for as long as advantages to making a gift. First, So what’s not to like about gifts? any post-gift increase of the value of (continued on page 6) There are at least three things to the gifted asset is excluded from your be considered before entering into an taxable estate. Second, post-gift income aggressive gift plan. inside this issue earned on the gifted asset is also ex- First, under our current estate tax cluded from your taxable estate. Third, 2 Oregon’s New Estate Tax law, an asset that passes on death re- transferred assets are excluded for 3 California Snowbirds: Avoid ceives a stepped-up basis to the asset’s Oregon and Washington estate taxes. an Additional Tax Burden fair market value as of the date of death These advantages, of course, would ap- 4 Getting Started in the Exit (or six months after the date of death, ply only to someone whose estate was Planning Process if the alternative valuation method can larger than the applicable estate tax ex- be used). The same asset transferred emption ($5 million federal, $2 million by gift carries forward the lesser of fair Washington, and $1 million Oregon). market value or the donor’s cost basis. Thus, if you assume that the asset will be disposed of when in the hands of www.millernash.com

Oregon’s New Estate Tax whatever remained of their $5 million problem. Oregon previously attempted by Ronald A. Shellan federal exemption to their spouse in to levy a tax at death on intangible per- ronald.shellan@millernash.com trust rather than outright. When the sonal property (e.g., cash, stocks, bonds, 503.205.2541 first spouse died, the $5 million passing contract rights) held by the estates of to the trust is not taxed because of the nonresidents. In the Internet age, it was In the last legislative session Or- federal $5 million exemption. When the always a contentious issue as to where egon extensively redrafted its woefully second spouse died, the assets in the intangible property is located. Oregon confusing and out-of-date inheritance trust were not taxed because they were now taxes intangible property only to tax laws. Many of the changes were technically not owned by the surviving resident decedents unless it is taxed in technical (such as changing the name spouse. This planning technique can another jurisdiction. There is no longer of the tax from an inheritance tax to save about $1,750,000 in federal estate an attempt to tax intangible property an estate tax), but some were not. The tax (or perhaps more if the amount owned by nonresidents. Thus, under changes are effective beginning in in the trust had increased at the time the new law, Oregon computes the tax 2012. of the second spouse’s death). The based on the value of all real property federal marital deduction tax savings and tangible personal property located Exemption and Rate Structure . The is now portable and a trust need not in Oregon and, for Oregon residents Oregon legislature toyed with o only, all intangible personal increasing the exemption from “ In the last legislative session p property unless that property is $1 million to $1.5 million. But s subject to an estate tax in a for- in order for this change to be Oregon extensively redrafted its e eign jurisdiction. revenue-neutral, Oregon would woefully confusing and out-of-date have had to have one of the high- Natural Resource Property . inheritance tax laws. ” est estate tax rates in the nation. T The Oregon law was also revised Avoiding considerable political to clarify and improve the exist- t b be used, but the portability feature has d b h bili f h heat, the legislature left the exemption ing natural resource property credit. not been not widely adopted because at $1 million. The federal exemption is The credit for farm, fishing, and for- it expires in 2012 and does not save still set at $5 million at least through est assets was revised to now include taxes on appreciation on the value of 2012, after which it is scheduled to be 15 percent of working capital as part the estate between the first and second reduced to $1 million. of the personal property used in these death. The typical trust structure was The legislature, however, did revise businesses. The credit formula was problematic for many Oregon couples. the rate structure. Previously, the substantially rewritten. It continues Because Oregon’s exemption is only rate was tied to a federal law that was to apply to estates whose natural re- $1 million, using the full $5 million repealed six years ago by the federal source property comprised more than federal exemption when establishing a government! The new rates now start 50 percent of the estate. The new credit trust caused $4 million to be taxed to out at 10 percent on assets valued in ex- amount is essentially the estate taxes Oregon on the first death. The new law cess of $1 million. For estates in excess applicable to the first $7.5 million of basically clarifies a workaround so that of $9.5 million, the tax rate tops out at natural resource assets. there is no Oregon estate tax on the first 16 percent. Gift Loophole . Oregon law regard- death of the $4 million as long as it is ing gifts is unchanged. Oregon does Marital Deduction . The law con- kept in a separate trust for the benefit not add back gifts made while a person tinues to allow a deduction for debts, of the surviving spouse and its value is alive in determining the estate tax. assets passing to a surviving spouse, or is included in the surviving spouse’s Each gift reduces the Oregon estate assets passing to charity. It continues Oregon taxable estate on the death of tax unless the gift reduces the estate and clarifies Oregon’s special marital the surviving spouse. below the $1 million exemption. If Jay property provisions. This is a bit com- Changes in Intangible Personal dies holding assets of $2.5 million, and plex. But essentially, to save taxes under Property . Oregon also fixed a vexing federal law, many wealthy couples gave (continued on page 6) 2 | miller nash llp | Estate Planning Advisor