It is important to realize that changes may occur in this area of law. This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.
Two types of taxes must be dealt with after death: income taxes and
death taxes. After death, final federal and Oregon personal income
tax returns are due (i.e., Forms 1040 and 40), covering income earned prior to
the date of death. In general, the decedent’s estate must also
file federal and Oregon “fiduciary” income tax returns
(Forms 1041 and 41) covering income earned after death. Death
taxes cover transfers of wealth by reason of death, and include
the federal estate tax, the federal generation-skipping transfer tax
and the Oregon inheritance tax. With proper planning during life, death
taxes can be reduced or eliminated. The gift tax prevents circumvention
of the death tax through large lifetime gifts. In general, to the extent
cumulative lifetime gifts exceed $1 million, a gift tax will be imposed.
The federal estate tax applies to estates in excess of $2 million for deaths in 2006, 2007 and 2008, and estates in excess of $3.5 million for deaths in 2009. Under current law, the federal estate tax will be repealed for deaths in 2010, and will then reappear with (only a $1 million exemption) for deaths in 2011 and thereafter. It is likely that Congress will enact a permanent exemption in lieu of the repeal in 2010 and reinstatement in 2011.
The federal estate tax is imposed on the net value of all property and possessions of the decedent, including property in the decedent’s name alone, property held in a revocable trust, the decedent’s portion of jointly-held property, life insurance proceeds, retirement accounts, and items in which the decedent controlled or retained an interest. The federal estate tax rate is 45 percent.
In general, the federal generation-skipping transfer tax applies to transfers to persons more than one generation younger than the decedent. The amount exempt from federal generation skipping transfer tax is equal to the amount exempt from federal estate tax, and the rate is the same.
The Oregon inheritance tax applies to taxable estates in excess of $1 million. In general, the rate is much lower than the federal estate tax, although a marginal rate of 41 percent applies to wealth between $1,000,000 and $1,093,785.
For large estates, the following planning techniques are commonly used to minimize death taxes:
For married couples, an important tool is the unlimited marital deduction that allows property to be transferred freely between spouses without federal estate or gift tax. This can defer tax until the death of the second spouse, or eliminate the tax entirely. If the surviving spouse is not a U.S. citizen, the marital deduction is not available unless the surviving spouse lives in the United States and becomes a U.S. citizen within nine months of the first spouse’s death.
A credit shelter trust or bypass trust is the cornerstone of death-tax planning. It is usually covered by several pages in a will or revocable trust, and not a separate document. The credit shelter trust is typically funded with the amount exempt from federal estate tax upon the death of the first spouse, i.e., $2 million for 2008 deaths. The key benefit of a credit shelter trust is that the trust assets are not considered part of the surviving spouse’s wealth and pass free of death taxes when the survivor dies. At the same time, the surviving spouse can typically draw on the credit shelter trust for living expenses. A credit shelter trust is a tax-driven planning vehicle, and is not needed if the surviving spouse’s wealth is less than the death tax exemptions in effect at the survivor’s death. Accordingly, it is common to employ a “wait and see approach,” in which the survivor can decide whether to fund the credit shelter trust (usually with disclaimers) when the first spouse dies.
Another way to avoid or minimize death taxes is to make annual gifts of $12,000 per person. This can be done without having to file a gift tax return. Further, one spouse can transfer up to $24,000 each year to an individual and treat the gift as having been made one-half by each spouse. If gifts are split, a gift tax return must be filed by April 15 of the year following the year of the gift. To the extent not in excess of the $12,000 per person annual limit, the gifted cash or property is eliminated from the transferor’s estate. Over a period of years, a couple with substantial wealth (and a large family) can dramatically reduce the size of their estate, assuming they are willing to make gifts.
Lifetime or death gifts to tax-exempt organizations and charities are also useful to minimize or eliminate death taxes.
Legal editor: David C. Streicher, May 2008