Clients often ask me how their estate plan may be affected by estate taxes. Currently, no Federal Estate Tax is imposed on estates under $11,580,000 (per person), affecting approximately 2,000 people (or 0.0006% of the population) in the U.S. Under the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, this exemption amount remains in place, with annual adjustments for inflation, until 2025, at which time it is slated to expire and return to the $5 million exemption amount in place prior passage of the TCJA, assuming no new laws are put in place first. While I have no crystal ball, based on what has happened before, we will see a reduction of the exemption amount, but not all the way back down to $5 million.
Oregon (one of 12 states, plus the District of Columbia, with an estate tax separate from the Federal Estate Tax) imposes an estate tax on estates over $1 million. There is no adjustment to the exemption amount, and nothing to suggest that the laws will change any time soon.
Oregon imposes this tax on all estates over $1,000,000, regardless of the decedent’s state of residency. For an Oregon resident, this includes all property except real property located outside Oregon and any personal property not taxed by another state or country. Deductions (i.e. funeral expenses, the decedent’s debts, mortgages) will lower the taxable estate. As an example, take an estate of $1,450,000 ($800,000 in real property located in Oregon, and $650,000 in personal property), with $20,000 in deductions. The gross estate is $1,450,000 and the taxable estate is $1,430,000 ($1,450,000 – $20,000 = $1,430,000), resulting in an Oregon Estate Tax of $43,000.
For a non-Oregon resident, only real and tangible property located in Oregon is included in the gross estate and the estate tax is prorated. Using the same estate as above, only the $800,000 real property located in Oregon is subject to the tax, and the estate tax is computed as follows: [$800,000/$1,450,000 = 0.551724] x $43,000 = $23,724, resulting in an Oregon Estate Tax of $23,724.
Residency is based on a person’s “domicile,” defined as “the place which an individual intends to be their permanent home and to which such individual intends to return whenever absent.” As this is not a particularly clear definition, we look at where one is registered to vote and what state issued one’s driver’s licenses as good indicators of one’s state of residency.
For married couples and registered domestic partners, revocable trusts can often offer estate tax planning provisions to shelter up to $2,000,000 at the second spouse’s death, (estate taxes are rarely due at the first spouse’s death). Other planning vehicles are available, but they are complex and should not be entered into without great thought and discussion with attorneys, accountants, and financial advisors.
NOTE: For current tax or legal advice, please consult with an accountant or attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
Most people are familiar with Powers of Attorney and how they work at a basic level. However, these documents can have very important consequences to your overall estate plan and should be thoughtfully drafted.
First, some important terminology to understand the different roles in a Power of Attorney. The Principal is the person creating the Power of Attorney, giving someone else authority over their financial decisions. The Agent is the person being given the authority. Now we can discuss how Powers of Attorney work.
Powers of Attorney may be broad or narrow in scope. For instance, the Principal can give the Agent powers to manage all of the Principal’s assets or limited them to only address real property. Powers may also be limited by time, allowing the Agent to manage the Principal’s assets while the Principal is away. However the Principal wants to limit the Agent’s powers, is fine; the Principal need only clearly state those limits in the document.
It is important to understand that in a general Power of Attorney, the Agent’s powers only exist as long as the Principal has the legal capacity to exercise those powers themselves. If something happens to the Principal and they are not able to manage their own finances (due to a coma, say), the Agent loses their ability to act on the Principal’s behalf.
This does not work so well in the world of estate planning, where we are creating documents specifically allowing others to help us if we are incapacitated. Luckily, this problem is easily addressed by making the Power of Attorney “durable,” allowing the powers of the Agent to continue even when the Principal lacks capacity. In Oregon, the default is that a Power of Attorney “durable;” however, I always in include specific language stating this intent, as this may not be the default in other states. Almost all of the Powers of Attorney I prepare are “durable.”
Another choice is whether to make the Power effective immediately or “springing.” A Power of Attorney that is effective immediately gives the Agent the powers in the document immediately upon the Principal signing it. Even though the Principal is fully capable of managing their own finances, the Agent has simultaneous full authority alongside the Principal. Typically, when naming a financial Agent, we do not want their power to exist unless we are incapacitated. To effectuate that, I advise a “springing” Power of Attorney – one which only comes into effect upon the Principal’s incapacity. In this situation, it is important to have a good clear definition of incapacity in the document itself in order to avoid court for the determination.
A well-crafted Springing Durable Power of Attorney often works best to satisfy my clients’ desire to have someone named to manage their assets only if they are unable to manage them alone. Working with an experienced estate planning attorney will ensure that your documents are drafted in a way most beneficial to your situation.
I am often asked to explain the difference between probate and trust administration and why I generally prefer trust administrations.
Probate is a legal process that takes place after someone dies. It includes identifying and inventorying the deceased person’s property, paying debts and taxes, and distributing the remaining property to the decedent’s heirs, or (if there is one) as the Will directs. In Oregon, probates are triggered if an estate is worth over $200,000 in real property, or $75,000 in personal property. Chances are, if you own a home a probate will be required at your death.
Probates can add unnecessary cost and time. First, there are court costs, which are based on the value of the estate (the larger the estate, the higher the cost). With court oversight comes higher attorney fees, since petitions must be drafted, served, and filed before many actions can take place. Probates also slow things down: it can take 6-8 weeks to go through the process of drafting and filing a motion to receiving the signed judgment. This can be frustrating for all involved and more expensive than necessary. All fees and costs are paid from estate property, which would otherwise go to those receiving the decedent’s property.
Trusts, on the other hand, can avoid the need for probate. A Trust is a legal arrangement in which a Settlor transfers property to the Trustee, who holds legal title to the property for a Beneficiary. In a revocable living Trust, the Settlor, Trustee, and Beneficiary are initially the same person, so we are in effect, transferring our property to ourselves to hold and manage for our own benefit. As long as the Settlor is alive and has the legal capacity to make changes, they may amend the Trust as often as they like. At the Settlor’s death, the Trust becomes irrevocable and cannot be changed.
Because legal title to the property is held by the Trust, rather than by the individual, there are no assets in the person’s name at their death and no probate is triggered. This is a subtle, but very important, technicality in avoiding probate. When the Settlor dies, many of the same duties as in a probate are required, such as paying off expenses, debts, and taxes, liquidating assets and distributing the Trust to the remainder beneficiaries. However, because Trust administrations happen outside of court, they tend to be simpler, faster and less expensive than probates.
The Trust only controls what it owns, so it is very important that title to the assets are changed correctly. Anything (other than retirement plans, annuities, and life insurance) remaining in the decedent’s individual could trigger a probate.
Having said all this, there are times a Will makes the most sense and working with a professional can help ensure you have the best plan for you. A well-crafted estate plan goes far in easing your loved ones stress and ensuring your estate is passed on to them in the most cost- and time-effective manner.