Oregon Estate Tax and Surviving Spouses: Portability, Bypass Trusts, and the OSMP Election

If you're a surviving spouse in Oregon and your combined estate is over $1 million, the way your late spouse's assets passed to you may have just cost your estate between $50,000 and $100,000 in future taxes — without anyone realizing it.

Oregon's refusal to recognize estate tax portability is one of the most consequential and least understood features of the state's tax code. Unlike the federal system, where a surviving spouse can inherit the deceased spouse's unused exemption, Oregon treats each spouse's $1 million exemption as "use it or lose it." Once the first spouse dies, that exemption is gone — unless specific planning structures were in place before the death occurred.

Oregon's $1 Million Exemption and the Portability Gap

Oregon imposes an estate transfer tax on any estate valued above $1 million. That threshold has been unchanged since 2012, despite the federal exemption climbing to $13.61 million in 2025.

At the federal level, Congress addressed the problem of double taxation for married couples by introducing "portability" in 2010. If a spouse dies and doesn't use their full federal exemption, the surviving spouse can inherit the unused portion — effectively giving them up to $27.22 million in combined shelter.

Oregon expressly rejects portability under state law. There is no Oregon equivalent.

The consequence: When the first spouse dies and leaves everything to the surviving spouse (which is common and maximizes the immediate marital deduction benefit), the deceased spouse's entire $1 million Oregon exemption evaporates. When the surviving spouse later dies, they face Oregon estate tax on any amount over $1 million — even though the combined couple could theoretically have sheltered $2 million.

A simple example: Husband and wife have $2 million in combined assets. Husband dies and leaves everything to wife. Wife now has $2 million. When she dies, $1 million of that is taxable. Oregon tax: approximately $100,000. With proper bypass trust planning, the tax would have been zero.

The Bypass Trust Solution

A Bypass Trust — also called a Credit Shelter Trust, an A/B Trust, or a Family Trust — is the standard estate planning tool for preserving both spouses' Oregon exemptions.

The mechanics: When the first spouse dies, up to $1 million of their assets is placed into an irrevocable Bypass Trust rather than passing directly to the surviving spouse. The surviving spouse can receive income from the trust and, typically, can access the principal for health, education, maintenance, and support. But because the surviving spouse does not have unrestricted control over the trust assets — no "general power of appointment" — the trust assets are not included in their taxable estate when they die.

Result: The first spouse's $1 million exemption is fully used by the assets in the Bypass Trust. The surviving spouse retains their own $1 million exemption for the remaining assets. The couple collectively shelters $2 million from Oregon estate tax — the maximum possible without a Bypass Trust being only $1 million.

The tradeoff: Assets in the Bypass Trust do not receive a second step-up in basis when the surviving spouse dies. Assets held outright by the surviving spouse do get a step-up at their death. For highly appreciated assets (a family home purchased decades ago, for example), the income tax cost of losing the second step-up can sometimes exceed the Oregon estate tax savings. This is a calculation that requires a CPA and estate attorney to model carefully based on the specific asset mix.

The Oregon Special Marital Property (OSMP) Election Under ORS 118.016

The Bypass Trust works well when estate values are between $1 million and roughly $2.7 million. But what about couples with estates between $1 million and $13.61 million who want to defer federal taxes into trust structures?

A standard bypass trust structure that fully funds $1 million into trust works cleanly for Oregon. But consider a couple with a $5 million estate who wants to place $3 million into trust for the surviving spouse at the first death. The $3 million in trust exceeds the Oregon $1 million exemption by $2 million — triggering an immediate Oregon estate tax at the first death, even though the federal system would see no taxable event (because the trust qualifies as a federal QTIP).

Oregon created the Oregon Special Marital Property (OSMP) election specifically to solve this problem.

Under ORS 118.016, the executor can elect to treat certain marital trust assets as "Oregon special marital property." This defers the Oregon estate tax on those assets until the death of the surviving spouse — analogous to the federal Qualified Terminable Interest Property (QTIP) election under IRC Section 2056(b)(7).

How the OSMP election works:

1. The executor files Form OR-706 and specifically identifies the trust property that will constitute the OSMP.
2. A signed, irrevocable statement from all permissible distributees (except the surviving spouse) must acknowledge and consent to the election.
3. If any distributee is a minor, a custodial parent or court-appointed guardian must sign on their behalf.
4. The election is irrevocable — once made, it cannot be changed.

The effect: the trust assets pass to the surviving spouse's estate for Oregon purposes, with the Oregon estate tax deferred to their death. The surviving spouse's estate must then file an Oregon OR-706 to report and pay the tax on both their own assets and the OSMP trust assets.

When to Use Which Strategy

Use a Bypass Trust (and skip the OSMP election) when:

• The combined estate is between $1 million and $2 million
• Asset appreciation potential is moderate (so the lost step-up in basis isn't catastrophically expensive)
• Simplicity is a priority — the Bypass Trust is cleaner to administer than an OSMP election

Use the OSMP election when:

• The combined estate is above $2 million
• The surviving spouse needs access to more than $1 million in trust assets for their lifestyle
• A federal QTIP trust is already in place, and you need Oregon to recognize a similar deferral for the excess above $1 million

Use both strategically for estates in the $2 million to $5 million range:

• Fund $1 million into a standard Bypass Trust (using the Oregon exemption at the first death)
• Elect OSMP for any additional marital trust assets beyond $1 million (deferring Oregon tax on the excess to the second death)
• This maximizes the use of both Oregon exemptions across both deaths

What Happens Without Planning

If a couple takes no action and leaves everything outright to the surviving spouse at the first death:

• No Oregon estate tax is owed at the first death (the marital deduction covers it)
• The deceased spouse's $1 million Oregon exemption is permanently lost
• The surviving spouse's estate will owe Oregon estate tax on everything above $1 million when they die
• On a $2 million estate, that's approximately $100,000 in avoidable estate tax

This is why estate attorneys consistently recommend that Oregon couples with combined assets above $1 million set up bypass trust structures or OSMP elections in their wills and trusts before either spouse dies. These tools cannot be applied retroactively after the death occurs — the executor can use the OSMP election if the will or trust already contemplates it, but cannot create a bypass trust structure from scratch after the fact.

For Executors Dealing With an Estate Right Now

If you are currently administering an Oregon estate and the decedent had a will or revocable living trust that includes bypass trust or OSMP provisions, your job is to execute those provisions properly — funding the trust with the right assets in the right amounts and, if applicable, filing the OSMP election with Form OR-706 by the 12-month deadline.

If the will leaves everything outright to the surviving spouse and the estate is above $1 million, there may be limited after-death planning options available — a surviving spouse's disclaimer, for example, can redirect assets in some circumstances — but these are complex and time-sensitive. Consult an Oregon estate attorney immediately if this situation applies.

The Oregon Final Tax & Estate Tax Guide covers both the bypass trust mechanics and the OSMP election procedure in detail, including the consent requirements, the proper way to report the election on Form OR-706, and the long-term implications for the surviving spouse's future estate tax planning.

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