Both the federal government and the Washington state government impose a tax on assets after an individual passes away. Not all assets are taxed as there is an “exemption” amount—an amount of assets that are excluded from tax. The federal estate tax exemption is very high in 2021 at $11.7 million per person (however, Congress is actively trying to lower it to around $6 million this very moment).
If you live in Washington state, the exemption is much lower at approximately $2.2 million. In other words, anyone whose cumulative estate—houses, cash, financial securities, and other assets—is worth more than $2.2 million at the time of their death will be subject to state estate tax. Washingtonians can top this threshold rather easily, as the median home price in Seattle is close to $900,000.
Washington Estate Tax Amount
Once a decedent’s estate goes past the $2.2 million exemption, taxes are levied on a graduated scale. Everything up to the first million dollars past the exemption is taxed at 10 percent. Every million dollars after that is taxed at 14 percent, then 15, 16, 17, 18, and 19. Everything between $7 million and $9 million past the exemption is taxed at 19.5 percent. Everything past $9 million of taxable estate assets is taxed at 20 percent. As you can imagine, this can lead to a tax bill of hundreds of thousands of dollars.
Minimizing Washington Estate Tax
As decedents’ estates go over the state exemption much earlier than the federal exemption, minimizing the Washington estate tax is typically more urgent. Fortunately, there are a few ways to minimize the state estate tax.
First, if you are married, you can effectively double the exemption amount to $4.4 million by using a credit shelter trust. The credit shelter trust uses up the first spouse’s exemption amount and preserves the surviving spouse’s exemption amount. One key planning strategy while using this technique is to ensure assets receive a double “step-up” in basis to their fair market value to also minimize the capital gains tax.
Another strategy to reduce estate tax is to gift money and assets. You can gift $15,000 per year, per spouse, to as many people as you want and not have federal gift tax complications. Also, Washington does not levy gift taxes, and the federal lifetime gift exemption is $11.7 million—the same as the federal estate tax exemption. You can use part of the federal exemption amount to gift assets away to get under the Washington state exemption amount and avoid the state estate tax.
Planning For Estate Taxes is Complex
Federal and state governments are motivated to get the money they believe is owed. Many Washingtonians are unaware the state tax on estates exists, much less how easy it can be to avoid it.
Washingtonians have a variety of tools at their disposal to minimize estate taxes, but only if they speak with an experienced estate planning attorney. Harbor Law Firm exists to help you save money, and we’d be honored to help you. Contact us today to schedule a complimentary consultation.