Usually you want to get your estate tax planning advice from an attorney. But it’s often helpful to understand beforehand some of the basic tactics available.
An upfront understanding better prepares you to talk with an attorney.
And then beyond that point? With some basic information, you may also be able do some thinking. Even take first preliminary steps.
Washington State Estate Tax Planning Tactic #1: Bypass Trust if Married
Here’s a first planning tactic: A married couple with a Washington estate in excess of the filing threshold (currently $2.193 million) probably wants to work with an estate planning attorney to establish a bypass trust.
Over at our blog, attorney Raemi Gilkerson explains how this works, so refer there for specifics: Washington Estate Tax Worries: Three Tips Save Millions.
But as quick explanation, a bypass trust essentially allows a married couple to double the $2.193 million exclusion amount, which means when the surviving spouse dies, the estate can avoid taxes on up to $4.386 million.
Note: If you’re unsure whether your estate might be subject to Washington state estate taxes, refer here: Washington State Estate Tax Returns.
Washington State Estate Tax Planning Tactic #2: Store Property Out of State
The Washington state estate tax formula adjusts your estate tax for out of state property.
Using big round numbers—but numbers that keep the example simple—someone with a $10 million net estate pays $1,690,000 of Washington state estate tax if all that property sits inside Washington state. (Note: The formula uses the estate tax rate schedule shown here.)
If the resident stores twenty percent of this property in another state and thus holds eighty percent of the property inside the state? Well, in that case, the resident’s estate only pays eighty percent of that $1,690,000.
Example: Again keeping the numbers really big so they’re easy to work with, suppose someone with a $10 million estate owns a $1 million home in Palm Springs. Also suppose they own another $1 million of other tangible property they hold in California—such as collectibles. Storing that last twenty percent of their wealth outside of Washington state saves them roughly twenty percent of the $1,690,000 of estate tax. That saves the estate about $338,000 in Washington state estate taxes.
Washington State Estate Tax Planning Tactic #3: Last-minute Large Gift Gifting
One other idea to know about. Washington state doesn’t adjust the $2,193,000 exclusion amount for pre-mortem gifts.
By the way, if you’re thinking that doesn’t sound quite right, let us point out that Federal tax laws, in comparison, do close this loophole when a person gives an individual more than $17,000 in a year. But the state estate tax works differently.
What this all means: Last-minute gifts reduce the Washington state estate tax.
Example: Again using the mythical Washingtonian with a $10 million gross estate, if she gives away $1 million in that last year of life to each her two children? The donor will need to file a federal gift tax return. And by giving away $1 million to both of her children, she will use up $2 million of her nearly $13 million (or possibly nearly $26 million) federal transfer tax exemption. But that may not matter if her estate falls under these federal thresholds. (In this example, the $10 million estate does fall under these exemption amounts.) Thus, these last-minute gifts will take $2 million dollars out of the Washington state net estate, thereby likely saving several hundred thousand dollars of Washington state estate tax.
One Last Planning Tip
You would want, probably, to combine these gambits and enjoy a snowballing-like benefit.
Someone who holds a $10,000,000 net estate without any planning might drop that to roughly $7.8 million with a bypass trust, for example.
Last-minute, million-dollar gifts to two children might drop that $7.8 million figure to $5.8 million.
Storing property out of state—so a vacation home or collectibles held out of state—might drop that $5.8 million even further to $3.8 million.
The Washington estate tax on $3.8 million is still significant. About $518,000. But that’s less than a third of the tax an estate might pay in the absence of planning.