Oregon Estate Tax: Natural Resources Credit
If you have not done so already, be sure to read our Oregon Estate Tax: Overview blog to get a quick look at the basics of Oregon estate tax law. Over the next few months, our estate planning attorneys will be covering ways to manage and mitigate Oregon estate tax. This month’s topic is the natural resources credit which can be applied against estate tax for farms, fishers, and foresters.
The natural resources credit under Oregon statute (ORS 118.140) allows small family farms, fishers, and foresters to shield assets used in their businesses from estate taxation if certain requirements are met. This is helpful – even necessary – for families to be able to pass on these types of businesses to following generations. Without it, families could find themselves needing to sell the farm, fishing boat, or timberland in order to generate enough funds to pay the tax due. I like to think that this is the government showing that it has some heart, however, it may just be that these types of businesses have good lobbyists. In truth, it is probably a bit of both.
The requirements to qualify for the natural resources credit are twofold, requiring meeting both “financial” and “family” benchmarks.
Financially speaking, the natural resources must qualify as “small” and must be a significant part of the overall estate. The entire taxable estate must be less than $15 million* – minus certain offsets and expenses – to qualify as small *(Senate Bill 59 just introduced in the 2023 Oregon Legislative Session proposes to increase this to $30 million). While most people do not think of $15 million as a small amount, business assets of these types of entities – especially real property – can add up rather quickly. We are not capturing “mega-farms” under this amount. In addition, at least 50% of the value of the overall estate must consist of property related to the natural resource. This is consistent with the purpose of the tax credit in that it is designed to protect estates that would otherwise struggle to preserve its business assets to pay estate tax.
To meet the family requirements, the property must have been used by the transferor (or a family member of the transferor) as part of a farm, fishing or forestry business for an aggregate period of five out of the eight years prior to the death of the transferor. Upon death, the natural resource property must be transferred to a family member, described in the statute as a spouse, ancestor, lineal descendant of individual, spouse or parent, or the spouse of lineal descendant. The property can also be owned within a family trust or a registered business entity (corporation, LLC) so long as it is owned by persons who would otherwise qualify. As such, businesses that are not legitimate “family businesses” they will not qualify.
Once the transfer is made to a family member after death the job is not quite done. The State of Oregon maintains tabs on the business for years following the death and transfer to make sure that the both the “family” and the “business” statuses are maintained. If the natural resource property is transferred to a person outside of the family or if it is not continued to be used in the operation of a farm, forestry or fishing business for at least five of the eight calendar years following the transferor’s death, the state can revoke the credit, charge the tax that would have otherwise been incurred and charge penalties. The recipient of the property must file an annual form with the state until the timing requirements have been met.
The natural resource credit is not so much a mitigation technique as it is a protection for small family farms, fishers and foresters where paying the tax could be detrimental. While it could be possible to invest assets in such a manner to keep them from being taxed, it would take an incredible amount of planning and follow through to stay within the parameters. However, if one were to have the funds, the time and the desire to invest in a farm, fisher or forest business for themselves or their family it could be a useful tool. At the end of the day, it is nice to know that there are protections in place for the families that operate these small businesses.
The above information is not intended to be legal advice but is for information purposes only. If you need information about how this natural resource credit may or may not apply to you be sure to seek the advice of legal counsel and your tax preparer.