Washington estate tax rates rank the highest of any state in the nation. The tax rates range from 10 percent to 20 percent and are graduated based on the value of the estate.
Washington does not, however, have an inheritance tax and the estate beneficiaries are not taxed upon receipt of assets, but there may be tax on the estate itself.
Note: To differentiate the two, an inheritance tax is a tax on the beneficiaries of an estate whereas an estate tax is a tax on the decedent’s estate.
What is the Washington Estate Tax?
The estate tax is a tax imposed on the transfer of property at the time of a person’s death. A Washington resident or non-resident who owned property in Washington at the time of their death may have an estate that owes estate tax depending on the value of their estate at the time of their death.
Understanding the Washington Estate Tax Exemption
The estate tax exemption for 2018 (meaning the amount you can pass free from your estate incurring any Washington Estate Tax liability) is $2,193,000. Estates above the exemption amount will likely incur estate tax. All assets of a person’s estate are included for calculating estate tax, including life insurance, retirement accounts and the fair market value of real estate.
The estate tax exemption increases by a small adjustment every year. However, the value of many estates are increasing faster than the Washington State estate tax exemption is increasing. Therefore, more individuals will likely have estates that will incur estate tax.
Implementing, with the assistance of an attorney, one or more of the three tips and strategies below can significantly reduce the estate tax liability that your estate may incur and save your estate thousands of dollars in estate tax.
Washington Estate Tax Tip 1: Create a Credit Trust
A credit trust, also called a bypass trust, is a simple and easy way to reduce or eliminate estate taxes. The trust can only be set up for the benefit of a spouse, you have to be married to utilize this tax saving strategy.
A credit trust is a testamentary trust, meaning it is a trust contained in a person’s Will and does not get set up or become effective until that person dies. When the first spouse passes away, he or she can pass assets to the surviving spouse in trust, which reduces the value of the estate of the second spouse to die when they pass away. An attorney can create a Will with credit trust language.
Example 1 (the “wrong way”): Mary and Joe are married, and each have exactly $2,193,000 in assets, for a total marital estate of $4,386,000. When Joe dies he gives Mary his $2,193,000, when Mary later dies her estate equals $4,386,000. Only the first $2,193,000 of Mary’s estate is exempt from the Washington estate tax, however. The estate tax on the remaining $2,193,000 equals roughly $270,000.
Example 2 (the “right way”): Martha and Peter are married, and coincidentally each also has exactly $2,193,000 in assets. But Martha and Peter have a Will with credit trust language. When Martha dies she gives Peter her $2,193,000 million in the credit trust, when Peter later dies the $2,193,000 in the credit trust is not included in his estate. Peter only has an estate of the $2,193,000 he owns outright. There is zero estate tax due at Peter’s death because his $2,193,000 estate equals the estate tax exemption.
Washington Estate Tax Tip 2: Charitable Giving
Charitable giving is a great way to lower your estate tax liability. Any asset that you gift to a charity will be excluded from your taxable estate for estate tax purposes and the charity will pay no tax on receipt of the item. There is no limit to the amount you can choose to gift to a charity (i.e. the $15,000 per person per year does not apply to charities), nor does the donation have to be in the form of cash.
You could donate your entire estate to a charity and your estate would not be obligated to pay any estate tax. The charity must be a qualified 501(c)3 organization. If you are planning on making a substantial charitable donation as part of your estate planning, you should ideally contact the organization first and obtain language that they require to be used in your estate planning. Additionally, many organizations are excited to have present and future donors participate in programs and love to get to know donors. It is a great way to get involved prior to making your charitable gift at the time of your death.
Washington Estate Tax Tip 3: Gifting
Gifting of money, property or other goods is a great way to reduce your estate tax liability by reducing the value of a person’s estate.
In 2018, an individual can make annual tax-free gifts of up to $15,000 per person (annual gift exclusion amount). Married individuals together can give $30,000 per person per year. Once an individual has made a gift, that gift is no longer included in their estate and thereby not included for estate tax purposes. Gifts do not have to be made in cash. Below are a few other ways to gift.
Gifting of property worth more than $15,000. Imagine an individual owns a piece of property valued at $150,000 and wants to make a gift to a child or grandchild. The individual can gift an interest worth $15,000 in the property each year for ten years. As a practical matter, it is a good idea to get valuations in the form of appraisals or at the very least several comparative market analyses of the property in the event there is a later challenge by the IRS of the value.
Gifts of tuition and medical expenses. You can contribute an unlimited amount for tuition and medical expenses, if you make the gifts directly to the educational organization or health care provider. The gift cannot be made directly to the individual in this case.
What if an individual wants to make a gift in excess of the annual gift exclusion amount?
They can; however, the following needs to be considered:
- The individual will need to file an informational gift tax return (IRS Form 709) in the year the gift was made.
- If the gift is greater than the annual gift exclusion amount, the excess amount of the gift will begin to use the federal unified gift and estate tax exemption.
The tips described in this blog post can be accomplished with the assistance of an attorney and with planning assistance from your CPA.
More About the Author:
Raemi Gilkerson is a partner in the Redmond, Washington law firm, Leos & Gilkerson PLLC. An estate planning attorney, she frequently advises and provides planning for clients in all stages of their lives including those with assets in excess of the Washington State estate tax exemption. Contact information for Ms. Gilkerson appears here.