- For 2024, the Washington estate tax starts to factor in at $2,193,000.
- It affects people residing in the state and non-residents who own property in Washington State.
- There are strategies to help avoid or reduce the tax.
The Washington State (WA) estate tax is a tax on the value of property you transfer at the time of your death. Yes, you read that right. When that day does finally come, depending on the value of your estate and a couple of other factors, WA will tax you again.
There are two types of “death taxes” at the state level: an inheritance tax, and an estate tax. The main difference between the two is that an inheritance tax is calculated on just the amount someone inherits, and the heir pays the tax. An estate tax is calculated on the decedent’s estate, and the estate pays the tax. Some states don’t have any “death tax”, other states only have one, and one state even has both!
In this article, we will focus on just the WA estate tax, but if you reside in another state, there will be some helpful tips that you can utilize.
WHEN DO YOU FILE A WASHINGTON ESTATE TAX RETURN?
At the time of death, all assets owned or partially owned by the decedent get valued at their “fair market value”, which is the price at which the property would change hands between a willing buyer and a willing seller. Not the potentially discounted price you would give family or friends, but a fair price you would get if you sold it to someone you didn’t know.
These assets include, but are not limited to:
- Real estate
- Interest in business entities
- Life insurance policies
- Pensions plans
- Mineral interest
For tough-to-value assets, such as real estate or art, you may need to enlist a third-party that can perform an IRS-certified appraisal to value the asset. Once the fair market value of the assets has been added up, you can then figure out if a WA estate tax return needs to be filed.
- A return is not needed - If the gross value of all the decedent’s property is under the $2,193,000 threshold. Great! One less thing you must get done.
- A return is needed - If the value is above the $2,193,000 threshold, then a tax return must be filed within nine months of the date of death, or an extension can be filed.
HOW DO YOU CALCULATE THE AMOUNT OWED?
Once you have the gross value of the decedent’s estate, then you can lower the value with any allowable deductions.
Some allowable deductions include:
- Funeral expenses
- Costs of administering the estate, such as attorney and accountant fees
- Debts of the decedents, such as mortgages or credit cards
- Expenses incurred from administering a trust
Then the amount above the exclusion amount ($2,193,000 for 2024) is taxed at the rates listed below:
For example, imagine an estate valued at $4 million after all the allowable deductions. The first $2,193,000 does not get taxed. The next million gets taxed at 10% for a total of $100,000. Then the remaining amount, $807,000, would be taxed at 14% for a total WA estate tax of $212,980.
Keep in mind, like most other tax laws and rates, these amounts can change in the future - higher or lower!
If your assets exceed the WA estate tax exclusion amount, you have a few options:
- Do nothing – Just because your estate might have to pay an estate tax doesn’t mean you have to take any action. The key is that you and your heirs are aware of the tax, so they are not surprised when it must be paid.
- Advance estate planning – West Invest, along with other legal professionals, can help assess your situation to determine if a family limited partnership, irrevocable life insurance (ILIT), revocable living trust, or other estate planning strategies are appropriate for you and your goals. These strategies can help minimize the estate or eliminate the tax.
- Gifting to others and charities – Assets gifted to charities can lower your estate value. These gifts can take place before or after someone dies. Assets gifted under the annual gift-tax exclusion are limited to $16,000 for a single person and can only be used to lower the value of the estate during one’s life.
- Spend it – You can spend down your assets to reduce the value of your estate below the exclusion amount. Keep in mind that money spent on tangible assets such as cars and boats, still count as assets. Therefore, if you use this strategy we suggest spending your money on experiences - for example, a vacation or classes.
- Change your permanent residence – As mentioned earlier, some states don’t have an estate or inheritance tax. Florida is one of those states. However, don’t move just to avoid the WA estate tax; as you can guess, there are many other factors to consider before relocating.
WHO SHOULD CONSIDER ESTATE PLANNING?
The short answer is: everybody. Even if your assets are well below the WA estate exclusion amount now, it doesn’t mean they will be at your time of passing. If you estimate to have at least ten years left to live, then your assets may grow to exceed the limit. Just look at what has happened to the value of real estate in Washington in the past couple of years. Plus, there is always a chance exclusion amounts will be lowered.
OTHER IMPORTANT FACTORS:
Most of the time WA doesn’t factor in outright gifts before death into the estate tax. However, there are a few scenarios when they may be considered:
- Federal gift tax paid within three years of death
- Proceeds of life insurance gifted within three years of death
- Revocable transfers
- Transfers taking effect at death o There are some special deductions available for farms and family-owned businesses.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Northwest Wealth Advisors, LLC is not giving tax, legal or accounting advice; consult a professional tax or legal representative if needed and before implementing any strategy.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Northwest Wealth advisors (NWWA), doing business as West Invest LLC, is a SEC registered investment adviser. Northwest Wealth Advisors, LLC and West Invest, LLC are separate entities from LPL Financial.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.