As of January 1, 2012, Oregon’s estate tax adopted a very significant credit to owners of natural resource assets. In fact, for those who qualify, Oregon’s Natural Resources Credit (the “NRC”) will eliminate any estate tax on qualifying natural resources property (“NRC Property”).
The NRC is available for three general classes of NRC Properties: forestlands, agricultural lands, and fishing-related assets. More particularly, the NRC applies to forestland or forestland homesites, timber, crops, fruit or other horticultural products, forestry business or farm business equipment, livestock, nursery stocks, and fishing boats, gear, and equipment. It also applies to working capital used in the qualifying activity of up to 15 percent of the value of the assets (but limited to $1 million).
The NRC is also available to estates owning an interest in corporations, partnerships, and limited liability companies that own NRC Property, if at least one member of the family participates in the entity’s operation.
There are, of course, a number of additional requirements and limitations to being able to utilize the NRC:
- The adjusted gross estate (value of assets less debt and certain deductions) must be less than $15 million.
- The value of the NRC Property must exceed 50 percent of the adjusted gross estate.
- The NRC is also limited to the first $7.5 million of NRC Property.
- The NRC Property must have operated for five of the last eight years by the decedent immediately before death or by a member of the decedent’s family.
- Following death, the NRC Property must be inherited by the decedent’s family and must continue to be used in the farm, forestry, or fishing business for five of the eight years following the decedent’s death.
If the NRC Property is sold after the death of the decedent, there will be a recapture of the tax. An annual form must be filed certifying that the NRC Property has not been disposed of. A tax-free exchange or condemnation of the NRC Property either before or after the death of the decedent is ignored if both the relinquished and replacement property was qualifying farming, fishing, or forestry property.
We have been involved in one larger estate that made significant use of the NRC. We discovered quite a number of issues and technical problems with the drafting of the statute that needed to be resolved. We found that the Oregon Department of Revenue responded to our questions and took positions that logically interpreted the statute to follow the obvious intent of the Oregon legislature to not tax NRC Property.
What practical planning can you do to take advantage of the NRC? You should review your situation with your tax advisor to determine whether you would qualify for the NRC and, as needed, adjust the ownership and operation of property to qualify for the NRC. If appropriate, adjust the amount of your cash, marketable securities, and life insurance that might be used to pay estate taxes to reflect the reduced Oregon estate tax bite. If you were considering gifting qualifying NRC Property to a family member, note that such a gift will not save Oregon estate taxes, which might have been a primary consideration in making such a gift. In some situations, it may make sense to exchange on a tax-free basis nonqualifying real estate assets into NRC Property to avoid Oregon estate taxes at death. It may also be important to provide in your will or revocable trust that any recapture of Oregon estate taxes be borne by the child or children who inherited the NRC Property. Finally, make sure that a family member, instead of an employee, materially participates in running the NRC Property if you can no longer do so.
In the right situation, the NRC can significantly reduce estate taxes. For an estate that held exactly $7.5 million in such assets, the savings would be at least $750,000 in Oregon estate taxes (Oregon tax rates start at 10 percent for estates of $1 million and increase to 16 percent for estates of $9.5 million or more). But note that the benefit of the deduction may be reduced, since the estate taxes paid to a state are deductible for federal estate tax purposes. Because the NRC can result in significant estate tax savings, proper planning with a trusted tax advisor to utilize the NRC is strongly advised.
Related Files: Estate Planning Advisor - Fall 2014