August 27, 2013
The tax environment affecting businesses is constantly changing. And, while we typically hear more about federal law changes, the State of Oregon also passes many tax laws with implications affecting the wine industry. This letter provides you with insights to help you determine Oregon estate tax implications that may apply to your business.
In June of 2011, the State of Oregon enacted HB 2541 which updated Oregon estate tax laws, in part, as a response to major federal law changes made in December 2010. You may be aware that the federal exemption from the imposition of estate tax increased from $3.5 Million to $5 Million as part of the end of the year tax act on December 17, 2010. Lesser known, is the fact that Oregon’s exemption from estate tax, which was scheduled to go up to an exemption of $1.5 Million, was, in fact, lowered to $1 million in the new Oregon law. Under the new law, an Oregon taxable estate of $2 million would owe approximate $100,000 of Oregon estate tax.
Fewer states are imposing estate taxes than ever before, but the fact remains that the states of Washington and Oregon do impose estate taxes in 2011 and will do so in 2012. Statistics from the Oregon Legislative Revenue Office for calendar year 2009 indicate that 67% of the estate tax returns filed in Oregon were for estates valued at $2 million or less.
Relief from Oregon tax does exist for certain farming operations. The new Oregon law provides an Oregon Natural Resources Credit in place of the prior exemption for natural resource property. Oregon farming operations that qualify include the value of vineyard land, possibly the value of land under a residence and the value of land under a small wine-making operation. The credit is only allowed if the property goes to qualified heirs. In essence, qualified heirs are immediate family members and lineal descendents of the decedent.
So, is this great news and not to worry? Not so fast. While property can escape taxation using the credit, the property must remain in qualified use for at least five out of the next eight calendar years following the year of death. If heirs dispose of the property during this time, then estate tax may be due within six months of the disposition.
What about the winery? The wine-making operation itself may not qualify for the above credit. In the past, there was some relief because Oregon law was tied to a federal law that allowed a special deduction for a “Qualified Family-Owned Business Interest”. Because the new law changes the date of tie-in to the new federal law with an effective date of December 31, 2010, the special deduction for family owned business goes away in Oregon beginning January 1, 2012.
Are you a larger operation with out-of-state owners? If so, be aware that the State of Oregon taxes Oregon real property, not just Oregon residents. If you have non-resident co-owners, you may want to review your ownership structure to avoid the imposition of the Oregon estate tax on non-resident owners.
There may be a way to avoid this outcome. The answer many are using is the formation of a limited liability company (an LLC) where the owner of the property is the LLC, not individuals. The individuals then own a personal property interest in an LLC, not a real property interest in Oregon. The Oregon Department of Revenue recently dropped their challenges to this type of ownership and may no longer pursue out-of-state decedents holding this type of ownership.
Planning to avoid estate tax is a very complicated task. Every individual’s situation is different. Due to the changes in Oregon law enacted in 2011, it may be best for you to review your current plan. You might consider an in depth session with your estate planning attorney. It is interesting to note that while Oregon does impose an estate tax, it does not impose a gift tax. The best plan may be to make gifts while living to avoid the imposition of the tax on your heirs.
If you have any questions regarding the Oregon Estate Tax, please give us a call or stop by our booth at the 2012 Oregon Wine Industry Symposium. We would be happy to discuss any questions you may have.