What You Need to Know about the Death Tax in Washington State

What do you need to know about the death tax in Washington state? Nobody wants to pay more taxes than they must. If you die without properly preparing for Washington estate tax you will be paying more in taxes and leaving less to your heirs.

The Difference between an Inheritance Tax and an Estate Tax

Washington state does not have an inheritance tax; however, Washington state in 1982, one year after Washington repealed the inheritance tax, enacted an estate tax. An inheritance tax is based on the value of a single gift and payable by the beneficiary; rates change based on the person receiving the gift’s familial relationship with the deceased. For estate tax, Washington uses the entire estate’s value, and a single tax rate is applied to the portion of the assets that exceed the exempted amount. An estate is all the assets and property that a person owns.

Washington State’s Exclusion Amount and Estate Tax Rate

Here are some facts about the death tax in Washington state. The current Washington state estate tax exclusion is $2,193,000, and this amount is not portable. Meaning, if a spouse dies, the assets pass to the other spouse, the dead spouse will have lost their $2,193,000 exclusion. At the time of death of the second spouse, the exclusion amount will only be $2,193,000 rather than an additive amount of $4,386,000. There is no tax when transferring assets between spousal partners, a straight transfer from one spouse to the other could result in excess tax at the time of the second spouse’s death. There are a few ways to preserve this $2,193,000 exclusion from the first spouse.

Washington state has a graduate sliding scale for the tax rate of the estate tax. This scale starts at 10% for the first $1,000,000 that exceeds the exclusion amount. At $9,000,000 over the exclusion amount of $2,193,000 the base tax is $1,490,000 plus 20% of the amount over $9,000,000.

Estate tax tables, Department of Revenue Washington State (last visited June 28, 2021 1:50 pm) https://dor.wa.gov/taxes-rates/other-taxes/estate-tax-tables#InterestRates

Estate taxes are Used for Education Programs in Washington State

Another aspect of the death tax in Washington state: Washington state uses estate taxes for educational purposes. The first educational place Washington spends estate tax is the student achievement fund that seeks to:

  • Reduce class sizes,
  • Increase the professional development of teachers,
  • Extended learned such as before and after school programs, and
  • Pre-kindergarten learning.

Second, estate tax funds learning assistance programs for underperforming K-12. Lastly, estate taxes fund higher education in Washington state, including:

  • Financial Aid
  • Retention Programs
  • Adult Basic Education Programs in Community Colleges
  • Work-Study Programs

Planning Optimum Tax Exposure

Create a “Washington credit shelter trust” that allows for the portability of the exclusion amount that is $2,193,000. It would be best if you created this trust for when either you or your spouse dies. This trust will enable you to maintain the $2,193,000 exclusion from the spouse that passed away and the exclusion for the living spouse for when they pass away. You can set up the trust so the living spouse is a beneficiary who can withdrawal and receive income from the trust for life. Creating this sort of trust will allow you and your spouse to maintain the $2,193,000 exclusion from the first spouse who dies. Because the surviving spouse never controlled the assets in the trust, they are not added to the surviving spouse’s assets. When the second spouse dies, the trust will transfer the remaining trust assets to the heirs without the estate tax. Credit shelter trusts are also commonly known as “AB trusts” or “Bypass Trusts.”

Gifting the money away during your lifetime is another way to avoid estate taxes. Under the current laws, gifting your assets away is an effective way to minimize the estate tax exposure of your estate. If you have concerns about leaving a burdensome tax situation for your family after you pass, you should contact an estate planning attorney. Below are two methods by which you can gift your assets.

The first method of gifting to move assets outside of an estate tax is an inter vivos gift. Inter vivos gifts are ordinary gifts made during the life of a person. These gifts are capped annually at $15,000 per person. Therefore, a marriage can give a single person $30,000/year without being taxed up to $11,580,000. This method gives complete control of the assets to the beneficiary immediately. If you are concerned about how the beneficiary will use the money, this is not the method you should use.

Creating an irrevocable trust naming beneficiary and depositing money as gifts in their name each year for the maximum tax-free amount is another method for optimum tax exposure. Just as an inter vivos gift each year a person may give tax-free $15,000 per person. Suppose you have many members of your family that you trust. In that case, you may create an irrevocable trust in their name and deposit into that trust $15,000/year per person named on that trust as a gift. The nice thing about this method is any of the beneficiaries may use as much money as is in the trust agreement. A person is allowed to gift up to $11,580,000 in their lifetime tax-free. Meaning if you have enough people and enough years left in your life, you could potentially gift $11,580,000 to whomever you wish in the form of an irrevocable trust. A problem with this method is if the trust agreement is not structured correctly or all the beneficiaries do not agree on the purpose of the money, someone could use the money for a purpose not intended by the person who created the trust.

Creating a beneficiary intentionally defective trust is another way to plan for optimum tax exposure (avoid estate tax) while still allowing the person who created the to control the assets. These are incredibly complex trusts set up by professional counsel but can help you avoid income tax and the estate tax on the money held inside the trust.

The last method is to consider creation of a trust in South Dakota. South Dakota trust law allows for trusts to exist forever and several other appealing tax deductions.

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