On February 3, 2005, the Washington Supreme Court rendered a decision that effectively repealed the Washington estate tax. The legislature and the governor responded by enacting a new State estate tax to address the loss of tax revenue that would otherwise be incurred by the State.
The estate tax applies to residents of Washington who die on or after May 17, 2005. The value of the estate for estate tax purposes is based on the fair market value of the assets of the decedent's estate, after the deduction of amounts that are owed as of the decedent's date of death and the expenses incurred in the administration of the estate.
The new law allows an exemption of $1.5 million for decedents dying in 2005 and $2 million for decedents dying on or after January 1, 2006. The new Washington estate tax would not be affected by any changes in federal estate tax exemptions and rates.
The new State estate tax rates start at 10% on values in excess of $1.5 million ($2 million after 2005) and increase gradually to 19% on amounts in excess of $9 million. The statute includes the following tax table:
If Washington Taxable*
The Amount of Tax Equals Initial Tax Amount Plus Tax Rate %
Of Washington Taxable Estate Value Greater Than
|Above $9,000,000||$1,440,000||19.00%||Above $9,000,000|
The amount of tax paid to the State will be deductible on the federal estate tax return, assuming that one is required to be filed. The current top marginal federal estate tax rate is 35%. The ability to deduct the Washington estate tax for federal estate tax purposes effectively reduces the marginal State estate tax rates. Accordingly, with a federal rate of 35%, the lowest effective State estate tax rate will be 6.5% and the highest effective tax rate will be 12.35%.
The Washington estate tax allows a deduction for the value of qualified "real property" and qualified "tangible personal property" used primarily for "farming purposes." The definition of "farming" is quite broad and includes the raising or harvesting of agricultural or horticultural commodities; the raising, shearing, feeding, caring for, training, and management of animals on a farm; and the planting, cultivating, caring for, or cutting of trees. To qualify for this deduction, certain percentage requirements must be met and various rules must be satisfied, including "material participation" in the operation of the farm by the decedent or a member of the decedent's family.
The federal estate tax law allows an unlimited deduction for property passing to one's spouse in a qualified manner. This same deduction is available for State estate tax purposes. Accordingly, it continues to be possible to defer the obligation to pay estate taxes upon the death of the first of a husband and wife to die if assets pass in a qualifying manner to, or for the benefit of, the surviving spouse, regardless of the value of the estate for estate tax purposes. The federal estate tax option of "portability" of a spouse's exemption, introduced in 2011, is not available for State estate tax purposes.
A Note on the Federal Estate Tax
Despite significant changes in federal tax law at the end of 2010, the future of the federal estate tax continues to be a heavily discussed topic in the U.S. Congress. The 2010 tax changes are effective only through 2012 unless Congress acts again. While some commentators now believe that full repeal of the federal estate tax is as likely as ever, Congress has proven itself impossible to predict.
The foregoing is intended to be a brief explanation of our new Washington estate tax and the status of discussions in the U.S. Congress regarding the federal estate tax. Regardless of what happens on the federal level, Washington residents must consider the impact of the new State estate tax on their estate planning. In particular, clients should give consideration to planning strategies that include:
- A review of the tax-related formula provisions in their planning documents to reflect the disparity between the federal estate tax exemption and the Washington estate tax exemption;
- The acceleration of lifetime gifts to utilize the full amount of the federal estate tax exemption ($5 million) because there is no State gift tax and those lifetime gifts would presumably not be taken into account in calculating Washington estate tax;
- A review of the location or situs of assets will become increasingly important. For example, if a family partnership or limited liability company holds real estate in another state, the Washington estate tax will be applied to include the value of that property in the taxable estate to the extent of the decedent's ownership in the entity. In the alternative, if the out-of-state real property were held in a living trust, the property would be considered located in the other state and, accordingly, not subject to estate tax in the state of Washington. One of the objectives in planning for such real property generally includes the avoidance of probate in the other state, and this can be accomplished through the use of the trust arrangement;
- Similarly, for nonresidents of Washington, it may be advisable to have real property and tangible personal property located in Washington held in a family partnership or limited liability company so that it has its situs in the other state, which may not have a state estate tax; and
- Finally, consideration should be given in appropriate circumstances to a change of legal residence. In doing so, it will be important to consider all of the tax implications, including whether the new state of choice has a state income tax.
© 2011 Perkins Coie LLP