An Oregon resident must worry about federal gift tax, federal estate tax, and Oregon estate tax. Federal estate tax is assessed at 40% of a person’s taxable estate over $5.34 (2014 number-adjusts for inflation). So if an Oregon resident has a $10 million taxable estate when he dies, his estate is left with a tax bill of $1.864 million (there is a deduction for state estate tax paid, but that is beyond the scope of this entry).
Federal gift tax is also assessed at 40% of a person’s gifts over $5.34 million. The $5.34 million exemption is cumulative over a person’s lifetime. In order for the IRS to keep track of how much a person has gifted, a gift tax return must be completed for gifts over $14,000. So if an Oregon resident gives his child $100,000 in year 1, he must complete a gift tax return, although no gift tax is due. If the same Oregon resident again gives his child $100,000 in year 2, he must complete another gift tax return, although no gift tax is yet due. But the IRS is aware that he has used up $200,000 of his lifetime exemption of $5.34 million. There is also a $14,000 gift tax exclusion per year per person. So Mom and Dad can each give their two children $14,000 without having to complete a gift tax return, which amounts to $56,000 per year of gifts from the parents to the children.
What the federal gift and estate tax laws essentially do is permit a person to give away $5.34 million during his life, or at his death, or a combination of the two. However, even though the gift tax parallels federal estate tax, gifting can minimize estate tax liability (beyond the scope of this entry). In order to prevent that from happening, all non-excluded gifts made within three years of the date of death are pulled back in the deceased’s taxable estate.
Oregon has its own estate tax, assessed on a sliding scale between 10% and 16%, with a $1 million exemption. So if an Oregon resident has a taxable estate of $1.5 million when he dies, assuming a 10% rate, his estate is liable for approximately $50,000 of estate tax.
Oregon has no state gift tax, and no three year pull-back rule (like the federal rule).
With proper planning, gift and estate tax liability can be minimized or eliminated.