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Apr
05

2011: Estate Planning in Washington State – The Good, the Bad and the Ugly

The Good News: Beneficial Changes to Federal Law for 2011 and 2012

After months of negotiations following the lapse of the Federal estate tax for 2010, Congress finally got around to enacting new estate tax rules at the end of last year.  On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was enacted which dramatically increased the number of estates exempt from Federal estate and gift taxes.  Specifically, the following features were included in the new law regarding estate and gift taxes:

  • The amount exempt from estate tax was increased to $5 million (from $3.5 million in 2009) for those who die in 2011 and 2012.
  • The lifetime gift tax exemption was increased from $1 million to $5 million and “unified” to the full extent with the estate exemption – meaning a person can make a combined total of lifetime gifts and bequests at their death of $5 million or less and avoid paying any Federal taxes.  The federal generation-skipping transfer tax exemption was similarly increased to $5 million (from $3.5 million in 2009)
  • The maximum estate tax rate was reduced to 35% (from 45% in 2009).
  • The new law also introduced the concept of “portability” into a married couples’ estate tax exemptions – “portability” allows the surviving spouse to utilize any unused portion of the $5 million exemption from the estate of their spouse who dies in 2011 or 2012.

The Bad News: No Guidance For 2013 and Beyond

For whatever reason, Congress decided to sunset the new rules at the end of 2012 which will result in estate, gift and generation-skipping transfer tax exemptions all reverting to $1 million starting in 2013.  The future of spousal exemption “portability” also remains unknown.  Additionally, the highest tax rate will increase from 35% to 55%.  While we can hope that Congress will at least extend these provisions, it is impossible to tell what the political landscape will look like in 2012 and 2013 when Congress will once again decide what the Federal estate and gift tax scheme will be.  Therefore, it is imperative that current Estate Plans have built-in flexibility regarding disclaimer and trust provisions to allow beneficiaries to take full advantage of whatever the tax laws may be in the future.

The Ugly: Washington State Estate Taxes Remain Unchanged

While it may seem like the changes now exempt nearly all estates from estate and gift taxes (at least until 2013), Washington State has its own estate tax on estates valued over $2 million which is unaffected by the changes at the federal level. Furthermore, the “portability” provision of the Federal estate tax does not apply for Washington State estate tax purposes.  While direct transfers to a surviving spouse are completely exempt from both Federal and state estate taxes at the death of the first spouse (the amount of gifts to a surviving spouse are deducted from the gross estate of the deceased), this deduction only defers Washington State tax on the estate until the death of the surviving spouse.  Simply put, this means that the combined estate of a Washington State couple will be subject to Washington estate taxes to the extent it is worth more than $2 million upon the death of the second spouse, unless appropriate tax planning measures are including in the Estate Plan.  Furthermore, because the taxable estate includes both probate and non-probate assets (including life insurance and retirement accounts) it is clear that many should be concerned about state taxes when discussing their Estate Plan.

It is possible that the Washington legislature may enact changes to our estate tax laws, but if anything it is more likely they will raise, not lower, the tax given past history and the current economic situation of our state budget.  In fact, in early 2010 a bill was introduced to double the current Washington State estate tax rates to 20% to 38%.

I cannot stress how important it is to discuss state tax implications on your estate with your attorney when reviewing your Estate Plan.

Legal Disclaimer

All of the above examples and discussion are based on the simple hypotheticals provided. Every Estate Plan requires an in-depth discussion of not only the assets and liabilities of those involved but also the desires and wishes regarding the use and enjoyment of those assets during life and after death.  There are numerous ways to incorporate estate tax reducing strategies into an Estate Plan, such as lifetime and charitable gifting and use of disclaimer and credit shelter trusts.  These strategies and their provisions need to be specifically tailored to each unique circumstance and consultation with an attorney should be an integral part of every Estate Plan. If you have questions regarding this material or your Estate Plan, please contact Ryan Velo-Simpson at (206) 660-9401 or ryan@ryanvelo-simpson.com.

IRS Circular 230 requires me to advise you that, if this communication contains any tax advice, the advice is not intended to be used, and cannot be used, for the purpose of avoiding federal tax penalties that may be imposed on the taxpayer. The advice was written to support the promotion or marketing of the estate planning services addressed in the advice.  The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. A taxpayer may rely on professional advice to avoid federal tax penalties only if the advice is reflected in a comprehensive tax opinion that conforms to stringent requirements.

2 comments

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  1. Bryan Rogowski says:

    The WA state exemption of $2 million sounds high for many people, but can quickly be reached by a young couple if the high earning spouse dies with a large term life insurance policy. Thanks for writing this article, Ryan, good information.

    1. Ryan Velo-Simpson says:

      That is exactly right Bryan, in fact I will be posting a few examples this morning illustrating how Washington estate tax would apply in various scenarios and this is one of the examples I use. Term life is wonderful for young families as it is extremely affordable and provides piece of mind regarding how a surviving spouse and children will be able to maintain their standard of living in case something should happen. The “problem” is that because it is affordable and the proceeds must last a long time, we tend to get large amounts of protection which, as you stated, can easily push an estate over the $2 million level and take a hit from Washington estate tax. The easy solution is to establish a testamentary trust (a trust that comes into being upon the death of the creator of the trust) in both spouses wills which either automatically gives some of the estate to the children or allows the surviving spouse to disclaim some of the estate and thus go into the trust for the benefit of the children – both methods will reduce the size of the surviving spouse’s estate upon her death and lessen or avoid any Washington state estate tax.

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