People are often anxious to avoid estate taxes when they pass on.
Federal estate taxes are no longer a problem for most people, since there is no federal estate tax unless the estate is over $11.2 million dollars.
Oregon state estate tax starts to be an issue for anyone who controls $1 million or more at the time they die.
Often such state estate taxes can be fairly easily avoided.
However, it can sometimes be a mistake to avoid these Oregon estate taxes.
The reason for this is that capital gains tax can be 15% to 20%, while Oregon estate taxes start at only about 10%.
In addition, one only pays Oregon state estate tax on amounts over $1 million in the taxable estate, while one pays capital gains taxes on the first dollar of profit from the sale of an appreciated asset.
If that appreciated asset has been run through an estate (whether or not the estate is subject to estate tax), there is a step up in basis to the value at the date of death of the person who owned the asset which passes through that person’s estate. Capital gains tax is charged only on the appreciation that occurs after that step up in basis to the date of death value, if the asset has passed through the decedent’s estate. It is not charged on the appreciation that took place during the decedent’s life if the asset passes through the deceased person’s estate.
This means that your beneficiary can sell your appreciated Microsoft stock, or the beach house that is now worth 10 times what you paid for it, without there being any capital gains at all, if the asset is run through your estate, and if the stock or the house is sold for the value it had on the date of your death.
In contrast, making a gift during life, or putting the appreciated asset into an irrevocable trust, deprives your beneficiaries of this step up in basis. When your beneficiaries sell the appreciated asset in these circumstances, they are likely to have to pay 15% to 20% capital gains tax on the full value of the appreciation.
For this reason, often the best way to avoid unnecessary taxes is to NOT avoid state estate taxes, but, instead, to maximize the amount of capital gains that your heirs can avoid. A skilled estate planner should be able to help you to select assets to place in various categories, or to advise you when you should focus on avoiding state estate taxes, and when you should focus on avoiding capital gains taxes.
Steven A. Heinrich
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