Preventive Measures to Reduce Your Estate’s Tax Burden
The goal of any estate planning should be to try to ensure as many assets as possible are passed down to beneficiaries – children, heirs, or charitable organizations. Part of ensuring that can happen is minimizing taxes on the assets of that estate. A well-developed Estate Plan will consider multiple types of taxes, including:
Washington Estate Tax
Residents of Washington State are subject to an estate tax of 10–20 percent depending on the size of the estate. This tax must be paid before any assets can be passed down to children, loved ones, or charities. The state of Washington charges this tax on anyone who has more than approximately $2.2 million in assets.
Some clients mistakenly think that the Washington Estate Tax does not apply to them. Remember that all of your assets—your home value and financial accounts—all contribute to your final assets. Careful planning and well-drafted documents can minimize the Estate Tax at the state level.
Federal Estate Tax
Assets may be taxed by the federal government before they are distributed to your loved ones or charitable organizations. The amount varies over time, but as of 2021, only estates larger than approximately $11.7 million are subject to the Federal Estate Tax. Careful planning can minimize the implication of this tax.
The Difference between the Washington Estate Tax and the Federal Estate Tax
The values for both the Washington and Federal Estate Tax vary across time. Currently, there is a large difference between the tax thresholds: approximately $2.2 million (the Washington Estate Tax exemption) and approximately $11.7 million (the Federal Estate Tax exemption). For individuals whose net worth falls in between these two values, there are unique estate planning strategies that can minimize taxes and maximize what assets you can pass down to your loved ones or on to charity.
Capital Gains Tax
If certain assets in your estate, like your house or stocks, increase in value across your lifetime, they are subject to a capital gains tax. The capital gains tax is a special tax on the increase in value over your purchase price. Proper estate planning minimizes the capital gains tax by providing a “step-up in basis” to your assets. This means that more wealth is passed on to your beneficiaries.
The person who gives an asset to somebody else is taxed at the federal level on the value of that gift. This is called the gift tax. Gifting away parts of one’s estate can be a powerful way to reduce taxes at the federal level. The lack of a gift tax at the state level in Washington state provides planning opportunities.
Generation Skipping Tax
Multigenerational gifts that are passed down across a generation—from a grandparent to a grandchild, for example—can be taxed at 40 percent under the federal generation-skipping tax. Planning can significantly reduce this tax.
Our Safe Harbor Estate Planning Process asks you about your assets and who you would like to benefit from your estate. With this information, we can customize an estate plan that is customized to your tax concerns. We also identify issues in tax planning that you may not have considered. The best planning is always done in advance.
Work With an Experienced Wills and Estates Lawyer
When you’re planning for the future security of your family, it’s in your best interests to have knowledgeable guidance every step of the way. That guidance doesn’t have to be painful or prohibitively expensive.
At Harbor Law Firm, we make estate planning as simple and stress-free as possible. That means:
- Knowledgeable guidance customized to your circumstances and your goals
- A fully remote process that never requires you to leave home
- Early morning, evening, and weekend hours to fit your schedule
- An adaptable process for exchanging documents and collaborating
- Flat-rate pricing that ensures you’ll never be surprised by a legal bill
We also offer complimentary consultations and can speak with you outside regular business hours. For more on our remote estate planning process, visit this page on our website.