The Tax-Inclusive Gift Strategy Calculator

If you’re a Washingtonian who worries about estate taxes? You should know paying gift tax can reduce estate tax. And maybe more than you might guess.

But let me explain how this simple technique works. And then illustrate why it’s so powerful using our tax-inclusive gift tax calculator (which appears below).

A $10,000,000 Gift Shows Mechanics

To set this up, assume your estate will be subject to the 40% federal estate or gift tax as well as the top state estate tax (currently 35%.)

Note: For the record, few families need to worry about federal estate taxes. But Washington state estate taxes kick in when an estate exceeds roughly $3,000,000. (More information: here.)

If you gift $10,000,000 in this situation, you pay a 40% gift tax or $4,000,000. That sounds terrible. But in effect, in a best-case scenario, you may be moving $14,000,000 out of your estate. Thus, one way to look at this is you’re paying $4,000,000 to move $14,000,000 out of your estate. And that amounts to a 29%-ish federal “estate and gift tax.” (Okay, maybe that still sounds like a lot. But 29% is less than 40%.)

Further, in the best case scenario, that $14,000,000 transfer zeros out Washington state estate taxes on $14,000,000 of your estate. That would save $4,900,000 in state estate taxes.

The Gift Tax Addback

But there’s a wrinkle here. If you die within three years of gifting, the gift tax you paid? It gets added back to the estate on which you pay federal and state estate taxes. In other words, that $4,000,000 in the earlier example? Your estate pays federal and state estate taxes on that money if you die within three years of the gift.

You still save taxes in this scenario. But the math gets tricky. Thus, the calculator below.

Using Tax-Inclusive Gift Strategy Calculator

The initial inputs show a $10,000,000 gift and set the federal estate or gift tax percent to 40% and the state estate tax to 35%. You can enter some other gift amount. Or change the estate and gift tax percentages. The calculator recalculates as you make changes.

Note: On July 1, 2025, the Washington state estate tax jumped from 20% to 35%. As I’m writing this, however, the state legislature is in process of enacting a bill that may return the top estate tax rate to 20% as of April 1, 2026.

Understanding the Tax-Inclusive Gift Strategy

A quick overview of the two potential savings that flow from a tax-inclusive gift:

First, if you gift, pay the gift tax, but then your estate avoids the gift tax addback? That means you only paid federal taxes on only a portion of the money you’re effectively moving out of your estate. (With the default inputs, this is the best case “all you pay is $4,000,000 of gift tax” scenario.)

Second, if you gift but your estate later does the addback? Then you lose some of the savings. Roughly half in fact with the default inputs. What’s happening here is, your estate pays state and federal estate taxes on the gift tax you paid to the IRS.

Third, if you do nothing? That’s the worst-case scenario modeled here. That worst case “pay state and then federal estate taxes” scenario means you first pay the Washington state estate tax on your $14,000,000 (or whatever). And then, after that, you pay the federal estate tax on the leftover.

In the area under the input boxes, the calculator shows the range of estimated tax savings a tax-inclusive gift generates for a specified gift amount.

Some Caveats

You need to think carefully about the tax-inclusive gifts. And probably you want the help of your tax and legal advisors. But some things to ponder:

You obviously are moving assets out of your estate. So that impacts your income and lifestyle potentially.

Related to this point, for good or bad, you also move income out of your estate and into your heirs. If you did move $10,000,000 from your investment account to your daughters and you paid a $4,000,000 gift tax, every year you would have held that money is a year you don’t earn income on the $14,000,000. But, of course, every year your daughters do earn income on $10,000,000. That’s something to consider.

If you gift appreciated assets you lose the Section 1014 adjustment (aka “step-up basis” adjustment). Probably, then, you would not want to gift appreciated assets.

Finally, whether this tactic makes sense and optimizes depends on your alternatives. Your estate planning attorneys have lots of other options which will potentially work well in scenarios where you’re not paying gift taxes.

Some Other Resources

Another high impact option for avoiding Washington state estate taxes (or income taxes) is changing domicile. We talked about that in a recent blog posts here: Washington State Millionaires Tax Residency Rules and here: Changing Your Washington State Residency.

If you’re interested in reading the actual law that creates the gift tax addback, that appears here: Section 2035.