2009 is a good time to review your estate planning documents, particularly those related to a bypass or “credit shelter” trust. The good news is that the federal estate tax exclusion amount for 2009 is $3.5 million per individual. That's an increase of $1.5 million over the $2 million available in 2008. With adequate planning, the increased exclusion should allow a married couple to leave up to $7 million to their heirs without paying any federal estate tax.  This is very important to small business owners and real estate investors.

The increased exemption level means no federal estate tax for most taxpayers. However, married couples should still review their estate planning documents for terms related to a bypass trust. If you have separate tax planning wills or trusts establishing a bypass or family trust in an amount equal to "the maximum statutory exclusion," you may end up funding more of the bypass trust than you intended since the exemption has increased from $1 million in 2003 to $3.5 million in 2009. It may no longer be desirable to transfer $3.5 million (if it represents the bulk of the estate) to a bypass trust  If all or most of the grantor's assets are to be transferred to a trust to benefit the surviving spouse that may not have been the original intent of the deceased spouse (grantor).  This is particularly true in a second marriage where the deceased spouse wants to benefit both the current spouse and his or her children from the first marriage.

In joint trusts each spouse is usually deemed to own an undivided one-half interest of the joint assets.  This prevents overfunding the bypass trust for estates up to 7.0 million.   However, retirement plans are outside of the trusts so it is still easy for one spouse to end up with the bulk of the assets in their estate since the surviving spouse is usually the primary beneficiary of the retirement account.

In Oregon clients must all be aware that the Oregon inheritance tax exemption is $1.0 million so bypass trusts should be divided into two sub-trusts to track the Oregon assets which exceed 1.0 million (for which an Oregon special marital property election is claimed on the Oregon inheritance tax return).  The excess will be taxed in Oregon in the estate of the surviving spouse.  If the excess assets are not tracked it may be difficult to trace the assets if the surviving spouse lives for more than a few years.

Finally if your estate is $1over the 1 million exemption, you must file an Oregon Inheritance tax return.  The first $100,000 over the exemption is taxed in Oregon at almost 38%!  This is because Oregon is going back and picking up the tax for lower estate amounts.   The tax average does not drop to about 10% until the estate is approximately 1.5 million.

Since Oregon has no gift tax it is a good strategy to do a gifting plan if your estate is slightly over the $1.0 million exemption and if you have enough other income to handle your future needs.

What will happen in 2010?  It is very unlikely there will be no estate tax in that year as provided in current law.  Bills are pending in conference committee which will freeze the federal exemption at 3.5 million and the maximum tax rate at 45%.   Keep tuned as we will more information hopefully by fall.   Oregon is not likely to increase its exemption due the revenue forecast (unless you own a farm, forest or fishing property and actively manage them).  So even if you do not have to pay Uncle Sam you are still going to have to pay Uncle Ted (Kulongoski).

The bottom line!  We should review our estate plans at least every five years. If you have a plan that does not take into account the increased federal exemption or the Oregon inheritance tax--- it is out of date and needs to be updated.  Because of the changes in the tax law this is the year to consider your estate plan again.  We would be happy to review your plan and make recommendations for your individual situation.