Individuals and families with significant assets often focus their estate plans on minimizing federal estate taxes. But for nonresidents with real estate in Oregon or Washington, state-level estate taxes can create a costly surprise. These states tax tangible property within their borders, even if the owner lives elsewhere. That means a vacation home, rental property, or land could trigger an unexpected estate tax bill. 

A simple legal strategy can sidestep this exposure: converting real property into an interest in a legal entity, such as a limited liability company (LLC). Because Oregon and Washington tax only tangible property owned by nonresidents, not intangible assets like LLC membership interests, the difference matters. 

Tangible vs. Intangible: The Key Distinction 

Oregon and Washington calculate estate tax for nonresidents based on whether property is tangible or intangible: 

• Tangible property—real estate, physical assets—located in the state is taxable. 

• Intangible property—stocks, bonds, partnership interests, LLC memberships—is not taxable. 

Owning a vacation home in Bend or a rental property in Seattle creates potential estate tax exposure. But if you hold the property through an LLC, the estate owns an intangible LLC interest, not real property. Oregon and Washington exclude intangible property from their estate tax calculations for nonresidents. 

The LLC Strategy 

Here’s how it works: 

1. Form an LLC in a state of your choice, typically where the property sits. 

1. Transfer the property title to the LLC. 

1. Retain ownership of the LLC membership interest. 

Upon death, the estate owns an LLC interest—an intangible asset—rather than real property. Both Oregon and Washington recognize this distinction and treat the LLC interest as intangible for estate tax purposes. 

Washington used to apply a “true business purpose” test to decide if an LLC would be respected for this estate tax treatment. As of June 1, 2020, Washington no longer requires a business purpose. Oregon doesn’t apply that test either. 

Important Caveats 

While powerful, the LLC strategy requires careful implementation: 

• Formalities Count: States respect LLC structures that maintain separate bank accounts, an operating agreement, and proper documentation. 

• Plan Ahead: Transfers close to death may draw extra scrutiny. 

• Income and Property Taxes Remain: This strategy addresses estate taxes only, not income taxes on rental income or ongoing property taxes. 

• Seek Professional Advice: Legal and tax professionals can help avoid unintended consequences. 

Why This Matters 

Oregon’s $1 million exemption and 16% top rate, along with Washington’s $2.193 million exemption and 20% top rate, make state-level estate taxes a serious concern. A $2.5 million home in Sunriver or Bainbridge Island could trigger an estate tax bill of several hundred thousand dollars. 

Converting real property into an LLC interest can preserve wealth for your beneficiaries while keeping you in full compliance with state tax laws. 

In estate planning, how you own property can determine your tax exposure. With careful structuring, you can keep more of your wealth in your family’s hands and avoid taxes from a state you don’t even live in. 

*See Disclosures