Oregon/California Estate Tax Quandary

[calmloki]

Been feeling pretty mortal lately. Suffice it to say that while mobile slim lucky and lacking in real bad habits the chances are good that I get switched off much earlier rather than later. My gal of 43 years and I, unmarried, have no kids. I'm not filled with philanthropic zeal. Gal and I live a very thrifty life - much of our joy comes from efficient use of time and money and repurposing or restoring to proper function the things others just throw away. We bought sad little rental houses and apartment buildings and put our vision, funds, and physical work into making them places that people liked living in. At 72 I'm pulling back from running the rentals - just don't have the desire or physical ability to do a decent job of it. We've sold some places and are down to a triplex and a 16 unit from our high of 53 units. We have more than enough to sustain one or both of us for a very long time. But efficiency...

Oregon has a 10-11.5% estate tax that kicks in above the $1M mark. California follows the Feds and has an $11.7M estate tax exemption.
Looks like if someone had a $4M estate Oregon would want about $345,000 for an estate tax. Unh Hunh!

Gal and I file separately, I claim our Oregon house and she claims our California house as our primary dwellings. We split our year pretty evenly between the two locations, each with a few extra days in our home states. We own all our real estate as well as most bank accounts, stocks, and loans and property contracts jointly. I'm thinking of declaring California as my primary residence. The annual tax rate is pretty similar to Oregon's. We've no intention to sell our Oregon house - we spent years at our most accomplished level doing a complete redo of the house for us rather than for tenants and Oregon in the summer is Glorious vs sizzling potato chip SoCal desert.

We spoke with a Washington/Oregon lawyer who does estates and she hasn't been real responsive - in the middle of a move. Spoke with our tax person who doesn't seem to be into planning, just preparation. So now I'm trying to figure out who does planning. A CPA seems like (pardon) a bean counter. A CFP seems like a manage our money till it's bled away type. A trust lawyer seems like they would just want to plug us into trusts - which MAYBE we need. I'm looking for someone who can look at our situation and offer thoughtful estate/tax suggestions.

Here's what I've thought:
Oregon's estate tax for residents is based on Oregon real estate, Oregon tangible property, and all intangible property divided by all assets worldwide minus the $1M exemption. Since we own jointly, just divide everything by two for my estate values.
Oregon's estate tax for non-residents is based on Oregon real estate plus Oregon tangible personal property but NOT intangible property divided by all assets worldwide minus the $1M exemption.
Intangible property includes "stocks, bonds, notes, currency, bank deposits, accounts receivable, ... limited liability interests ..." We have about $3.5M in jointly held bank accounts, Cds and stocks. About $1.3M in promissory notes from property sales. About $660K in Oregon land sale contracts - not sure if those qualify as "notes" or not. Our homes in Oregon and California are worth maybe $450K each. and the remaining rentals in Oregon maybe $1.8M and $450K. My numbers are all over the board because of what I don't know, but it seems like as a California resident my Oregon non-resident tax might be more in the $125K range.

Now if we were to form a California LLC and put all the Oregon contracts and property into it as a foreign LLC maybe we could get the Oregon tax WAY down - but levels of complexity and unknown costs...

Things I haven't mentioned yet, if your eyes aren't spinning yet, are that I'm a Kaiser Permanente medical member, which is available in California and Oregon, but not many other states. Don't really want to jump medical ship at this particular point. Wouldn't seem prudent.
Also, maybe in three years or so, as the weather heats up down south we might decide to sell the California house and avail ourselves of the homeowner exemption. Does seem prudent.

Anyway, if you have anything to add - like, "hey dummy, a land sales contract is NOT a note" or California's full, we don't want your kind around here or suggestions for the job title or suggestions for a particular pro who could help us I'd sure appreciate it. I know there are some very savvy California tax people on here and right now I'm just thrashing in the water. - Oh - did I mention our California house flooded about three weeks ago and we don't have a place to live down there at the moment?

 

[Sunset]

I have no advice, but certainly have gained an understanding of your position.

While younger than you, I fell down some stairs, and for the past month, just the thought of doing any landlord repairs or even my own home maintenance is painful.

 

[EastWest Gal]

Your post is interesting and I admire your success.

I’m not sure what you’re asking here, other than saving on Oregon’s estate tax. You and your partner have been together 43 years. You have no heirs. I assume you’ve named each other in your wills? After that what happens to your estate?

Since an estate tax applies after you are deceased, you really have no skin in that game once you are gone. If you are concerned about your gal after you are gone, there is a rather simple solution.

Here is my thought: Marry her.

In your instance, the relationship is well established anyway. In many ways, marriage has a business component when it comes to estates and taxes. Everything left to a spouse is exempt from Oregon’s estate tax. You can continue to live exactly as you are, file taxes separately, share the accounts, etc. Nothing else changes. But she won’t owe Oregon estate tax and neither will you. Oregon will get its tax money after the second one of you passes.

It seems that marriage will end up costing you less than a lawyer, CFP, or a CPA.

Good luck with the flooded California house.

 

[cathy63]

California follows the Feds and has an $11.7M estate tax exemption.

California has no estate tax, hence no use for an estate tax exemption. Seems like it would make sense to become a California resident before you die. Maybe also to sell the remaining Oregon rentals so there's less real property to deal with. If you do sell the CA desert house, you can always find someplace else in CA, or maybe consider WA.

 

[calmloki]

California has no estate tax, hence no use for an estate tax exemption. Seems like it would make sense to become a California resident before you die. Maybe also to sell the remaining Oregon rentals so there's less real property to deal with. If you do sell the CA desert house, you can always find someplace else in CA, or maybe consider WA.

Thanks, was hoping for a response from you. Idea in fact is to sell the Oregon rentals to minimize Oregon estate.

Any idea if the land sale contracts are treated like "intangible" notes or accounts receivable? A regular owner carry contract property sale involves trading a signed deed for a promissory note, but I may have shot myself in the foot by doing a couple land sale contracts, retaining title to the property until it's paid off, thus making them tangible assets?

Washington has Kaiser Permanente, no income tax, and a $2M estate tax exemption. Some attraction there, but I'd like a larger estate tax exemption.

 

[calmloki]

Your post is interesting and I admire your success.

I’m not sure what you’re asking here, other than saving on Oregon’s estate tax. You and your partner have been together 43 years. You have no heirs. I assume you’ve named each other in your wills? After that what happens to your estate?

Since an estate tax applies after you are deceased, you really have no skin in that game once you are gone. If you are concerned about your gal after you are gone, there is a rather simple solution.

Here is my thought: Marry her.

In your instance, the relationship is well established anyway. In many ways, marriage has a business component when it comes to estates and taxes. Everything left to a spouse is exempt from Oregon’s estate tax. You can continue to live exactly as you are, file taxes separately, share the accounts, etc. Nothing else changes. But she won’t owe Oregon estate tax and neither will you. Oregon will get its tax money after the second one of you passes.

It seems that marriage will end up costing you less than a lawyer, CFP, or a CPA.

Good luck with the flooded California house.

Elegant and simple solution. For some reason it bothers me that after more than 40 years together without a marriage contract we would get one to save some tax money. Dunno.

 

[cathy63]

Thanks, was hoping for a response from you. Idea in fact is to sell the Oregon rentals to minimize Oregon estate.

Any idea if the land sale contracts are treated like "intangible" notes or accounts receivable? A regular owner carry contract property sale involves trading a signed deed for a promissory note, but I may have shot myself in the foot by doing a couple land sale contracts, retaining title to the property until it's paid off, thus making them tangible assets?

Washington has Kaiser Permanente, no income tax, and a $2M estate tax exemption. Some attraction there, but I'd like a larger estate tax exemption.

Google tells me that Oregon law says:

"“Tangible personal property” includes but is not limited to all chattels and movables, such as boats and vessels, merchandise and stock in trade, furniture and personal effects, goods, livestock, vehicles, farming implements, movable machinery, movable tools and movable equipment."

"Intangible property" includes "Money at interest, bonds, notes, claims, demands and all other evidences of indebtedness, secured or unsecured, including notes, bonds or certificates secured by mortgages."

This is just a guess, but it seems like a deed with your name on it would be "real property" and a property where you hold a lien, as in a seller-financed mortgage, would be "intangible property" but since the collateral is located in Oregon, it may still be subject to inheritance tax. Hopefully your estate lawyer can clarify that when you reconnect with her.

Is there a provision in your contracts that tells what percentage of the property is owned by the purchaser at any given time, so it would be clear that only x% of the value is part of your estate? Would it make sense for the purchasers to refinance through a bank and pay you off at whatever point in time when you become a California resident? I'm not familiar with this type of sale, so maybe a refi is not possible.

 

[calmloki]

...

Is there a provision in your contracts that tells what percentage of the property is owned by the purchaser at any given time, so it would be clear that only x% of the value is part of your estate? Would it make sense for the purchasers to refinance through a bank and pay you off at whatever point in time when you become a California resident? I'm not familiar with this type of sale, so maybe a refi is not possible.

No such provision in our contracts. Drat. A relatively tiny house land sales contract could be refi d, and to the buyer's advantage interest-wise, so maybe I'll suggest that. An 8-unit we just sold this year we sold at a very low interest and as a TOD sale - when we both are gone so is the buyer's debt. Wouldn't make financial sense for him to refi as he stands to profit substantially by our demise. We were doing a transfer of property that works sort of like an inheritance but involves him working for his - and our - benefit.

 

[pb4uski]

Just wondering if it might make sense to create a C corp, contribute all of your Oregon property to the C corp in exchange for shares in the C corp... I "think" that would eliminate all of your Oregon estate tax risk.... no different from a California person owning shares of Nike. 21% corporate tax rate but you're probably already paying that anyway.

Not sure if an LLC would dodge the Oregon estate tax issue or not.

Seems like what you need is an attentive estate planning lawyer.