2012 Estate Planning: Gift tax opportunities for Washington residents

Due to current federal and Washington state gift and estate tax laws, along with uncertainty with respect to future changes in these tax rules, this year represents a potential once-in-a-lifetime opportunity for many Washington families to reduce their taxable estate and pass on more of their assets to their beneficiaries. If you are a Washington resident and have a moderate to high net worth, there may be unique opportunities available to you to utilize the federal gift tax exemption to move assets outside of your taxable estate for both federal and state taxes. There are several important basic rules related to estate and gift taxes to keep in mind:

  1. Your “taxable estate” includes ALL of your assets such as retirement accounts, life insurance death benefits, separate property, one-half of community property, assets held in a revocable living trust; however, it does not include any gifts that you have made during your lifetime. It is important to remember that just because something passes outside of probate (retirement accounts, life insurance) it does not mean that it is not part of your taxable estate. If you think you do not have sufficient assets to consider estate planning, but own large term life insurance policies or have significant retirement accounts, you should carefully review your situation to better assess the true value of your “taxable estate”.
  2. The federal tax laws currently allow you to exempt the first $5 million of the combination of lifetime gifts and taxable estate. This is referred to as the “unified credit” since it unifies the gift tax exemption and estate tax exemption into one amount.
  3. Washington state taxes only your estate at your death and does not currently have a tax on gifts made during your lifetime.

While the current estate tax laws allow an exemption of the first $10+ million per couple at the federal level, and $4 million per couple at the Washington state level (assuming you have a tax efficient estate plan in place), these exemptions are very likely to change in the near future. The federal laws expire at the end of this year and, absent congressional action, will roll back to exemptions of  only $1 million per person and tax rates of 55% on the amount in excess of $1 million. While it is impossible to guess what congress will do these days (especially in an election year) it is very possible that the estate tax scheme going forward will fall somewhere in between what we currently have and what will happen in 2013 absent a new law. In fact, President Obama’s recently proposed budget included provisions regarding estate and gift taxes which will reduce the estate tax exemption to $3.5 million per person but drastically cut the gift tax exemption to only $1 million per person (a “de-unification” of the credits). While the Washington state estate tax has not changed for some time and there are currently no proposals to make any changes, it is perhaps only a matter of time until someone in Olympia makes a grab for some extra revenue for the state -  in fact, just last week a bill was introduced to create a Washington state capital gains tax.

So what does all this mean for Washington residents who currently have assets, or the potential for assets at their death, close to the Washington state exemption amount of $2 million? First of all, you should have a conversation with an attorney about your estate plan. This actually goes for anyone that owns assets, has children, or is concerned about who will get what upon their death. Your 2012 estate planning should include a discussion about tax and gift planning and the potential to gift assets away this year to your children (e.g. into a trust that manages the money, pays for necessary expenses, and keeps the children and potential creditors from accessing the principal until later in their life) – this is because of the combination of the current very large unified federal exemption (remember it is over $10 million for a couple for the combination of lifetime gifts and taxable estate) and the fact that Washington does not currently tax lifetime gifts. Making gifts this year allows you to move assets outside your taxable estate at both the federal and state level and take advantage of a large federal gift exemption and no state gift taxes. This is a rare opportunity, especially considering the fact that testate and gift tax exemption levels will be changing at the end of this year.

What sorts of gifts would be ideal and how to accomplish such gifting should be analyzed very carefully by an estate planning professional during an in-depth conversation concerning your financial needs, resources and goals in conjunction with an analysis of your personal giving and planning desires. No situation is the same in estate planning and careful planning is vital to reach both your tax goals as well as your personal goals for your estate plan.

Ryan Velo-Simpson is an attorney licensed to practice in Washington state who has a solo practice focused on estate planning. To contact Ryan regarding your estate plan, please call at (206) 660-9401 or email at ryan@ryanvelo-simpson.com. This article constitutes attorney advertising and is meant only for Washington residents. Any advice in the article is only for illustration purposes and does not constitute attorney advice.


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