Do I need a will if I have a trust?

Yes. Even with a living trust, you need a pour-over will to capture any assets that weren't transferred into your trust during your lifetime. Without one, those assets pass through Oregon's intestacy laws rather than according to your wishes.

What is the difference between a will and a living trust?

A will takes effect at death and must go through probate before assets are distributed. A living trust takes effect immediately, avoids probate, and allows for faster, private transfer of assets to your beneficiaries. Trusts also provide better protection for blended families and beneficiaries who are minors or have special needs.

How much does estate planning cost in Oregon?

Track Town Law offers flat-fee estate planning services in Oregon and Idaho. Fees vary based on the complexity of your plan — whether you need a simple will package, a full revocable living trust plan, or a more complex plan involving Medicaid planning or special needs considerations. Consultations are free.

Do I need an LLC for my small business in Oregon?

Most small business owners in Oregon benefit from forming an LLC. It separates your personal assets from business liabilities, can provide tax flexibility, and signals credibility to clients and vendors. The key is not just forming the LLC but setting it up correctly with an operating agreement, a dedicated bank account, and an EIN.

What does Medicaid planning involve?

Medicaid planning involves structuring your assets and income to qualify for Oregon Medicaid long-term care benefits while protecting as much of your estate as possible. This may involve Medicaid Asset Protection Trusts, spousal protection strategies, and coordinating with VA benefits if applicable. Planning works best when started at least five years before care is needed.

Can I work with Track Town Law if I don't live in Eugene?

Yes. Track Town Law is a fully virtual firm serving clients throughout Oregon and Idaho. All meetings are conducted by video or phone, and documents are signed electronically. You never need to come to an office.

What is Oregon's estate tax threshold?

Oregon imposes its own estate tax with a threshold of $1 million — significantly lower than the federal exemption of $15 million. This means many Oregon families who wouldn't owe federal estate tax may still owe Oregon estate tax. Proper planning with trusts and other strategies can reduce or eliminate this exposure.

How do I get started with Track Town Law?

Start with a free consultation. You can book online at tracktownlaw.com/book-now. Consultations are conducted by video or phone and typically last 30 to 45 minutes. There is no obligation and no charge for the initial meeting.

Oregon Estate Tax and Life Insurance: When Your Death Benefit Creates a Tax Problem

Jun 10

Written By Jared Hight

In Oregon, life insurance death benefits count toward your taxable estate — even though they pass outside of probate. For families near the $1 million threshold, a policy you bought to protect your family can become the thing that triggers a tax bill. Here's what to know and what to do about it.

Life insurance is supposed to protect your family. You pay premiums for years so that when you die, your loved ones receive a lump sum — tax-free income that covers what you would have provided. It's one of the most common tools in personal financial planning, and for good reason.

What many Oregon families don't realize is that the death benefit that passes tax-free to the beneficiary as income can still be taxed as part of your estate. And in Oregon, where the estate tax threshold is just $1 million, a modest life insurance policy can be the difference between an estate that owes nothing and one that owes tens of thousands of dollars.

Life Insurance Counts Toward Oregon Estate Tax

Oregon's estate tax is calculated on your gross estate — the total value of everything you own at death, regardless of how it passes to your heirs. That includes assets that go through probate, assets held in a revocable living trust, assets with beneficiary designations, and — critically — life insurance death benefits on policies you own.

If you own a $500,000 term life insurance policy, that $500,000 is counted toward your Oregon taxable estate even though your beneficiary receives it directly and pays no income tax on it. The death benefit passes outside of probate, but that doesn't mean it passes outside of your estate for tax purposes.

For many Oregon families, this comes as a surprise. The common assumption is that assets with beneficiary designations — retirement accounts, life insurance, POD bank accounts — don't count toward estate taxes because they avoid probate. That's incorrect. Whether an asset avoids probate has no effect on whether it's included in your Oregon taxable estate.

As covered in the Oregon estate tax threshold post, Oregon's $1 million exemption has been in place since 2012 and applies to your global estate — all assets you own, in all states, at the time of death.

How Quickly Life Insurance Can Push an Estate Over the Threshold

Consider a married Oregon couple in their 60s with the following assets:

Home with $400,000 in equity
Retirement accounts: $350,000 combined
Savings and investment accounts: $150,000
Term life insurance: $300,000 policy on each spouse

Without the life insurance, the estate of the first spouse to die is approximately $900,000 — just under Oregon's $1 million threshold. Add one $300,000 term policy, and the estate reaches $1.2 million. Oregon estate tax applies to the amount over $1 million, and the rate starts at 10%.

That's $20,000 or more in Oregon estate tax on an estate that wasn't "wealthy" by any conventional measure — triggered almost entirely by life insurance the family bought to protect themselves.

With both spouses' policies included, the combined estate picture is larger still. And life insurance death benefits don't just affect the first death — they affect the second death calculation as well, when the surviving spouse's estate may include both the remaining assets and a policy on their own life.

The Solution: An Irrevocable Life Insurance Trust

An Irrevocable Life Insurance Trust — commonly called an ILIT — is the primary tool for removing life insurance from a taxable Oregon estate. When an ILIT owns the policy rather than you, the death benefit is excluded from your gross estate for estate tax purposes.

Here's how it works:

You create the ILIT. The trust is irrevocable — it cannot be amended or revoked once established. You are not the trustee; a trusted individual or professional trustee serves in that role.

The ILIT owns the policy. Either the trust purchases a new policy on your life, or you transfer an existing policy into the trust. The trust is both the owner and the beneficiary of the policy.

You fund the premiums. You make annual gifts to the trust, which the trustee uses to pay the premiums. To qualify these gifts for the annual gift tax exclusion — currently $19,000 per recipient in 2025 — the trust typically includes what are called Crummey provisions, which give beneficiaries a brief withdrawal right that makes the gift eligible for the annual exclusion.

At your death, the trust receives the death benefit. The proceeds are held in the trust and distributed to your named beneficiaries according to your instructions — which can include staggered distributions, provisions for a surviving spouse, or protections for minor children.

Because the ILIT owns the policy and you have no incidents of ownership over it, the death benefit is excluded from your Oregon and federal taxable estates.

The Three-Year Rule for Transferred Policies

There is one critical timing issue: if you transfer an existing life insurance policy into an ILIT and die within three years of that transfer, the death benefit is pulled back into your taxable estate under federal law (26 U.S.C. § 2035). Oregon follows this federal treatment.

The three-year rule does not apply if the ILIT purchases a new policy directly — meaning a trust that buys a new policy on your life avoids the lookback period entirely. This is why estate planning attorneys often recommend establishing the ILIT before purchasing new coverage, rather than trying to transfer an existing policy after the fact.

If you already own a significant policy and want to move it to an ILIT, the planning still makes sense — you just need to survive the three-year window for the transfer to be fully effective.

ILITs and Married Couples

For married couples, an ILIT requires careful drafting. If you name your surviving spouse as the sole beneficiary of the ILIT, the death benefit may be included in their estate when they eventually die — defeating the purpose.

The typical structure names the surviving spouse as a permissive beneficiary — able to receive distributions at the trustee's discretion — while the primary remainder beneficiaries are children or other heirs. This allows the trust to support the surviving spouse without pulling the assets back into their taxable estate.

For couples who are also using a credit shelter trust to preserve both Oregon estate tax exemptions, the ILIT and credit shelter trust can be coordinated to work together — using the life insurance proceeds to fund distributions or to provide liquidity for estate tax payments without forcing a sale of other assets. As covered in the credit shelter trust post, the combination of both tools is one of the most effective strategies for Oregon families approaching or exceeding the $1 million threshold.

When an ILIT Makes Sense for Oregon Families

An ILIT is worth considering if:

You own life insurance and your combined estate — including the death benefit — is approaching or exceeding Oregon's $1 million threshold
You want to use life insurance to provide liquidity to pay Oregon estate taxes without the proceeds themselves being taxed
You have a blended family or other circumstances where you want to control how the death benefit is distributed after your death
You want to protect the death benefit from the beneficiary's creditors or a potential divorce

The strategy involves real complexity and ongoing administration — annual Crummey notices, trustee involvement, coordination with your financial advisor on premium payments. It's not the right tool for every situation. But for Oregon families where life insurance is creating or compounding estate tax exposure, an ILIT is often the most direct solution available.

Bottom Line

Life insurance death benefits count toward your Oregon taxable estate even though they pass outside of probate. For Oregon families near the $1 million threshold, a policy designed to protect your family can end up triggering a tax bill that erodes what you're leaving behind.

An ILIT removes the policy from your taxable estate, keeps the death benefit available for your family, and gives you control over how and when the proceeds are distributed. The time to set one up is before you die — and ideally before you purchase the policy.

At Track Town Law, I offer flat-fee estate planning and can help you evaluate whether an ILIT makes sense as part of your Oregon estate plan. Schedule a consultation here.

This post is for general informational purposes only and does not constitute legal or tax advice. ILIT planning involves complex federal and Oregon tax rules that are specific to individual circumstances. Contact a licensed Oregon estate planning attorney and a CPA before making any decisions.