Don’t Forget About Washington State’s Estate Tax

KEY TAKEAWAYS:

  • Though the federal estate tax exemption has increased dramatically, Washington state’s estate tax exclusion is significantly lower.
  • Washington state taxes estates valued at more than $2.193 million—don’t take your eye off the ball!
  • Even if a Washington married couple’s joint estate value is under the combined individual limit of $4.386 million, they could still face estate tax exposure without proper planning.
  • Washington state does not have a gift tax. This encourages proactive giving to minimize state estate tax exposure.

As the new tax reform package was signed into law in late 2017, the estate tax exemption at the federal level increased to $11.2 million per person ($22.4 million for a married couple) starting in 2018. That’s twice as high as it used to be (i.e. $5.49 million per person in 2017). This increase now excludes an even greater number of people from paying federal estate tax – at least until the new law expires at the end of 2025.

However, if you live in the state of Washington, you still face a state estate tax that applies to estates valued over $2.193 million per person ($4.386 million for married couples). The tax rate on assets more than the $2.193 million exclusion starts at 10 percent and rises to 20 percent, so it can be a significant expense.

Assets considered part of your estate include your house, your investments, your IRAs, 401(k)s, annuities, and other real estate and life insurance proceeds. Remember, if a married couple’s joint estate is under $4.386 million, they could still be subject to estate tax if they don’t have a proper will and trust structure in place.

REAL WORLD EXAMPLE

Let’s look at a married couple worth $3 million, well under the combined exclusion of $4.386 million. If the first spouse dies and the will does not allow for a credit shelter trust, assets pass directly to the surviving spouse free of estate tax. However, the surviving spouse now has an estate of $3 million and assets of $807,000 which are subject to a 10 percent tax rate ($80,700) at the time of their death. This example shows why it is so important to make sure your estate documents are up to date, especially as your net worth changes.

A GIFT FOR WASHINGTON RESIDENTS

Fortunately, there are no gift limits or gift taxes in the state of Washington. Even if your estate is more than the exclusion amount, you can reduce your estate tax exposure through a well-conceived gifting plan.

At Soundmark, we work closely with you, your estate attorney, and your accountant to ensure you are addressing your federal and Washington state estate taxes proactively. It’s not always an easy task since there are often competing priorities in estate planning. For instance, the need to maintain enough assets to sustain your standard of living must be weighed against gifting assets to charities or beneficiaries (either directly or in trust) to avoid or minimize estate tax at your death.

We help our clients with the estate planning process by:

  1. Working with your estate attorney to develop a will and trust structure that is specific to your situation. This includes evaluation of your net worth, estate tax exposure, and developing a plan regarding your charitable goals and inheritance goals to your beneficiaries.
  2. Working with you to update beneficiary designations and account titles to ensure they are properly structured based on your estate plan.
  3. Working with you, your estate attorney, and your accountant, if appropriate, to develop a gifting strategy that minimizes your estate tax exposure. This process has several important steps:
  • Creating retirement projections to understand the assets needed to sustain your desired standard of living.
  • Evaluating assets that can, or should, be gifted.
  • Creating a timeline for your gifting strategy.
  • Determining the right vehicle for the gift, including charity, trusts, generation-skipping trusts, and direct gifts to beneficiaries.

REVIEWS ARE ESSENTIAL

Estate planning is not a one-and-done exercise; it’s an ongoing process that needs to be evaluated regularly. An individual’s net worth can change dramatically over the years, as well as their desire to make charitable bequests and create a legacy for their beneficiaries. Life circumstances continually change over time—as do federal and state estate tax laws. That’s why it’s essential to review your estate and beneficiary designation periodically. We’re here to help you any time.

 

Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other successful and accomplished individuals to help them define their financial goals and implement an ongoing financial planning process.