by Joseph A. Lewis, JD, CPA
Although estate and gift taxes are now combined, the rates can be as high as 40% for federal and 10% for state. For federal purposes there is an exclusion of $5,340,000 of the estate’s value as of date of death ($1,000,000 for Oregon), which prevents them from being effective for most estates. Further the $14,000 gift tax exemption may further prevent exposure.
To avoid complications upon death, we recommend our clients place securities in transfer on death, or payable on death checking, savings, and brokerage accounts; put your personal residence in land trusts, and cash in joint accounts designating children when appropriate.
Portability allows the lesser of the unused portion of the deceased spouse’s exclusion amount or the exclusion amount in effect in the year of death ($5,340,000 in 2014), to be transferred to the surviving spouse. However, to claim portability of unused exemption between spouses, the personal representative must make an election, which is irrevocable, by filing a form 706, even if the decedent’s gross estate is below the filing threshold. For spouses that remarry, only the most recent spouse’s unused exclusion amount is available.
If the decedent’s estate is not valued above the exclusion amount, they may still claim portability without reporting a value on the estate in the 706, but they must report the description, ownership and beneficiary of the property.
Portability is not available where the property passes to a non-spouse recipient, is valued for eligibility for alternate valuation, or a partial disclaimer such as a QTIP election is made. Where available, the valuation must be rounded to the nearest $250k.
Without portability, a taxpayer would maintain control and title of $5,340,000 into a bypass trust, which avoids taxation by the marital exclusion and the rest in a marital trust is which gives wealth to the wife, and then to the beneficiaries on the death of the second spouse using the second spouse’s exclusion. A trust arrangement may still be helpful since there is no portability provision for Oregon estates.
To establish such a trust arrangement, some attorneys recommend a formula clause which might read as follows: “If my spouse survives me, the trustee shall allocate, as of the date of my death, from the trust principal to the Marital Trust the smallest pecuniary amount necessary to produce the least federal estate tax payable by reason of my death, taking into account the federal credit for state death taxes only to the extent that state taxes paid are not thereby increased. The trustee shall allocate to the Family Trust any part of the trust principal not allocated to the Marital Trust.”
Conclusion: even though an estate may not need to establish a trust account to protect assets from federal taxation because portability will protect combined marital assets between $5,340,000 and $10,680,000, couples should establish a marital trust and a family trust to protect combined marital assets between $1,000,000 and $2,000,000 to protect from Oregon estate taxes, for which portability is not available.