Have We Saved the Family Farm? A Look at House Bill 3201
By Amy Lefore
SAALFELD GRIGGS PC
Many individuals may not realize that there has been a significant change in the structure of the Oregon inheritance tax as it relates to individuals who own farm land, forestland and commercial fishing operations. This significant change came in the form of House Bill 3201 (“HB 3201”) which established a $7.5 million dollar exclusion from Oregon’s inheritance tax for the owners of natural resource property and commercial fishing property. While there is no doubt that this could bring significant savings to many Oregon families, a closer look at HB 3201 reveals some significant ambiguities.
The $7.5 million dollar exclusion from the Oregon inheritance tax allowed by HB 3201 applies to individuals who pass away after January 1, 2007, owning either natural resource property or property used in commercial fishing. As defined by HB 3201, natural resource property includes the following real property qualifying for a designation as:
- Farm use;
- One or more farm use homesites;
- Forestland; or
- Forestland homesites related to the real property, not to exceed 5,000 acres.
The definitions for farm use and farm use homesites can be found in Oregon Revised Statutes (“ORS”), Chapter 308, and the definitions for forestland and forestland homesites are found in Chapter 321.
Further, HB 3201 extends the exclusion to property used in commercial fishing operations and property used in the processing or marketing of commercial fishing products. The exclusion can only be claimed if the natural resource property or property involved in commercial fishing is transferred to a qualified family member, which includes a spouse, natural or adopted child, natural or adopted grandchild, or a natural or adopted brother, sister, niece or nephew of the decedent.
Additionally, a family member obtaining natural resource property must utilize the property as natural resource property for five out of the eight years following the decedent’s death. Failure to continue the use of the land as natural resource property results in a calculation to recapture a portion of the inheritance tax that would have been assessed without the exclusion.
There are some ambiquities relating to HB 3201 as well. The first area of ambiguity is a question relating to the scope of HB 3201. Some commentators have expressed concerns that HB 3201 as written only allows the exclusion for land and not buildings, or even timber, on the land. The rationale behind this conclusion rests on the fact that HB 3201 states that in order to qualify for the exemption, the natural resource property must be “real property” as defined in ORS 307.010, and also must lawfully qualify at the decedent’s death as farm use or forestland property. In looking at ORS 307.010, the definition of real property clearly includes buildings, structures, machinery, equipment and various other items associated with the real property. However, the argument is being made that the statutory definitions relating to farm use or forestland, which are found at ORS 308A.056 and ORS 321.201, only allow the actual land to lawfully receive the designation as farm use or forestland. Consequently, further direction will be needed to determine exactly what can be claimed as part of the natural resource exclusion.
Another consideration is whether taking the natural resource exclusion will cause the property that is subject to the election to lose the advantage of an adjusted cost basis in the property. In a typical inheritance situation, the individual inheriting the property receives the property with a basis that reflects the value of the property as of the date of the decedent’s death. However, an area of concern is the fact that HB 3201 explicitly states that the Department of Revenue shall adopt rules consistent with section 2032A of the Internal Revenue Code (“IRC”) to help interpret the provisions of HB 3201. IRC 2032A also addresses the exclusion of property from a decedent’s estate, but this section states that property excluded shall have a basis equivalent to the cost basis the decedent had during their life and not a basis adjusted to a date-of-death value. Consequently, individuals will need to carefully consider if the use of the exclusion outweighs the risk of a loss in the property’s basis.
Further concern centers on the question of whether property that is held in an entity, such as a limited liability company, S corporation or C corporation, will qualify for the exclusion. Some commentators have concluded that an interest in an entity will not qualify because HB 3201 appears to indicate that the ownership must pass directly from the individual. Yet, as stated above, direction was placed within HB 3201 for further rules to be adopted that are consistent with IRC 2032A. In looking to IRC 2032A for guidance, the IRS clearly allows the federal exclusion to apply to property that is owned in a business entity. Consequently, if rules are adopted that are consistent with IRC 2032A, then property that is owned in an entity should qualify for the Oregon exclusion under HB 3201.
Finally, another concern and potentially unintended result of the statutory wording is that HB 3201 states that natural resource property must be used as natural resource property for five out of the eight calendar years following an individual’s death in order to qualify for the full exclusion. Yet, the statute’s language defines natural resource property as property qualifying for farm use or forestland. This may have been an unintended consequence, but the statute clearly defines commercial fishing property separately, and currently there is no requirement that it continue to be used in commercial fishing for any length of time following an individual’s death.
It is certain that there are many ambiguities to address in moving forward with the implementation of HB 3201. However, for the owners of natural resource property, and commercial fishing property, the horizon is a bit brighter.
If you would like further information on HB 3201 or would like to talk about your estate planning needs, please call a member of our Estate Planning Practice Group.