Clients Living Outside of Oregon and Washington With Real Property In-State Should Consider Holding via an LLC
Legal Alert
Many clients, as well as their advisors, are unaware of how the Washington and Oregon estate tax systems work with respect to real and tangible personal property owned in these states by people domiciled elsewhere. In both Oregon and Washington, owning real property and tangible personal property in-state, whether titled in your individual name or in a revocable trust, will likely cause state estate tax if your overall net worth exceeds the state exemption, even if you live elsewhere.
While there is no hard and fast definition of “domicile,” the term is generally defined to mean the place an individual considers to be their permanent home and to which they have the intent to return, even after a long absence.
In determining whether a taxpayer has changed domicile, a state taxing authority may consider several factors, including the time a taxpayer is physically present in the new state and whether the taxpayer has purchased a home in the new state, among several other factors.
An example: A client living in California has a vacation home in Washington, worth about $2 million. She assumes that because the house is worth less than the Washington estate tax exemption of $2.193 million and she owns it in her revocable trust, that it will avoid probate and estate tax in Washington. Unfortunately, that’s incorrect. While she will avoid a Washington probate, the Washington estate tax will apply, and her estate will owe some estate tax. If her overall net worth is $10 million, Washington will look at the estate tax owed on an overall estate of $10 million, which is $1,257,365, and her estate will owe 20% of that amount, or $251,473. (This is because her Washington estate, the $2 million home, is 20% of her overall estate.)
The same is true for Oregon, though the exemption is $1 million, and the rates vary between 9% and 16%. And, of course, this example holds for clients living in any state other than Washington and Oregon, not just California.
The solution is relatively simple. We recommend considering holding out of state property, located in Washington or Oregon, in an LLC or a partnership. If the property is rented, an analysis of the income tax consequences should be performed before implementing this plan. This plan may also trigger the need to register to do business locally, especially if the property is financed or produces income. It may also be worthwhile to consider which state an LLC should be formed in, for privacy and other concerns, and whether the LLC membership interest should be held in a revocable trust or otherwise.
Alternatively, some people are considering changing domicile. If you are considering whether to change your Oregon or Washington domicile and establish residency in another state, we are available to discuss what factors may be relevant based on your specific facts and circumstances.
Please let us know if you would like to discuss these questions in more detail.
While there is no hard and fast definition of “domicile,” the term is generally defined to mean the place an individual considers to be their permanent home and to which they have the intent to return, even after a long absence.
In determining whether a taxpayer has changed domicile, a state taxing authority may consider several factors, including the time a taxpayer is physically present in the new state and whether the taxpayer has purchased a home in the new state, among several other factors.
An example: A client living in California has a vacation home in Washington, worth about $2 million. She assumes that because the house is worth less than the Washington estate tax exemption of $2.193 million and she owns it in her revocable trust, that it will avoid probate and estate tax in Washington. Unfortunately, that’s incorrect. While she will avoid a Washington probate, the Washington estate tax will apply, and her estate will owe some estate tax. If her overall net worth is $10 million, Washington will look at the estate tax owed on an overall estate of $10 million, which is $1,257,365, and her estate will owe 20% of that amount, or $251,473. (This is because her Washington estate, the $2 million home, is 20% of her overall estate.)
The same is true for Oregon, though the exemption is $1 million, and the rates vary between 9% and 16%. And, of course, this example holds for clients living in any state other than Washington and Oregon, not just California.
The solution is relatively simple. We recommend considering holding out of state property, located in Washington or Oregon, in an LLC or a partnership. If the property is rented, an analysis of the income tax consequences should be performed before implementing this plan. This plan may also trigger the need to register to do business locally, especially if the property is financed or produces income. It may also be worthwhile to consider which state an LLC should be formed in, for privacy and other concerns, and whether the LLC membership interest should be held in a revocable trust or otherwise.
Alternatively, some people are considering changing domicile. If you are considering whether to change your Oregon or Washington domicile and establish residency in another state, we are available to discuss what factors may be relevant based on your specific facts and circumstances.
Please let us know if you would like to discuss these questions in more detail.
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