Many people’s estates don’t file a federal, estate-tax tax return. The filing thresholds are huge.
In 2023, for example, your gross estate needs to exceed $12,920,000 before your executor or personal representative needs to file a federal Form 706 and potentially pay estate taxes.
Washington state, unfortunately, sets a far lower filing threshold. And many more estates get hit. But let’s go over the details. And then explain how executors and personal representatives need to plan as a result.
The Trigger for Filing a Washington State Estate Tax Return
An estate needs to file a Washington state estate tax return if the decedent (the person who died) leaves a gross estate of $2,193,000 or more.
The gross estate includes all of a person’s assets at death. For example, if a person’s death triggers a $1,000,000 life insurance claim, that counts. If a person holds a defined contribution retirement plan or individual retirement account with $500,000, that counts. If a person owns a $700,000 house, that counts.
With a $1,000,000 life insurance claim, a $500,000 retirement plan, and a $700,000 house, a person’s gross estate totals $2.2 million—just over the threshold that triggers filing.
Mortgages, loans payment and other liabilities get ignored for purposes of calculating the gross estate. For example, and here we use an extreme example, say a person’s only asset is a $2,200,000 house with a $2,199,999 mortgage. This person’s net worth equals $1, the net equity they have in their home.
But even though this person’s net worth might be only $1, their gross estate equals $2,200,000. And the estate owes the state of Washington an estate tax return.
Community Property Half Counts Toward Filing Threshold
One wrinkle to mention. Community property counts one-half toward the $2,193,000 filing requirement threshold.
For example, keeping the example simple, say a married couple own a single asset, a home, as community property and the home is worth $2,200,000. When one spouse dies, that spouse’s gross estate equals $1,100,000. Accordingly, her or his estate does not need to file an estate tax tax return with the State of Washington.
Note: The actual estate tax tax return adjusts for the community property on the return. Also, an estate doesn’t pay Washington state estate tax on bequests to the surviving spouse.
No Inflation Adjustments Mean Number of Filing Estates Increase
A final quick note, which is partly a plea for fairness from the Washington state legislature and partly a caution for people who think their estates won’t ever need to worry about an estate tax return because they’re several hundred thousand dollars or more below that filing threshold.
The state does not adjust the $2,193,000 filing trigger for inflation.
That $2.193 million threshold, which was set in 2018, really should be about $2,586,000 in 2022. And then probably closer to $2,800,000 for 2023.
Thus, if your estate is even close to the filing threshold now, your personal representative or executor should plan on filing when the time comes. And maybe even more actionable? You probably want to consider some estate planning.
When a Washington State Estate Pays Taxes
An estate pays taxes when the net estate exceeds that $2,193,000 threshold.
The net estate equals the gross estate minus bequests to the decedent’s spouse, the decedent’s debts (including their share of a mortgage), the expenses of administering the estate, and then a handful of deductions including one for charitable contributions from the estate.
The tax rate on the net estate starts at 10 percent. That’s the rate on the first million dollars of taxable estate in excess of that $2,193,000 threshold.
For example, a net estate of $3,193,000 pays a 10 percent tax on the $1,000,000 excess over the $2,193,000. That tax equals $100,000.
Then the estate-tax tax rate coasts up to 20 percent by the time the net estate crosses $9,000,000. (Click here for the current estate tax rate table.)
An important note: Because gross estates commonly distribute to spouses, ignore mortgages and other debts, and then haven’t yet been adjusted for allowed deductions, often an estate files an estate tax return that includes no estate taxes. That’s good in one sense. But it also means the estate and its executor bear the cost and burden of filing a time-consuming tax return at the same time as the family tries to work through the first part of its grief.
Three Other Things to Know about Washington State Estate Tax Returns
The estate tax return is due nine months after the decedent passes. An estate can obtain a six-month extension of the tax return filing deadline but still needs to pay the tax by the nine-month marker.
The actual estate tax return doesn’t really work like a normal income tax return. The executor or personal representative for example doesn’t just prepare and submit forms. Rather filing the estate tax tax return resembles an IRS audit. Every transaction amount, asset or liability needs to be substantiated with a source document that proves some number on the return. The estate needs appraisals and valuations, preferably from a firm on the state’s approved vendor list, for all the valuable assets.
If you’re thinking the actual estate tax tax return will probably be several inches thick? Yes. You’re right.
At the time we’re writing this, the Department of Revenue takes about a year and a half to process an estate-tax tax return. And often, the filing includes some telephone calls and correspondence between the state and the estate’s representative.
One final comment: Your attorney can probably refer you to a good accountant who prepares Washington state estate-tax returns. But if you want to talk with us, we’d be happy to prepare and file the state estate tax return and if necessary the federal estate tax return. (You can click here to reach out: How to contact us.)