| The New Washington State Estate Tax |
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May 18, 2005
When my children were young my wife and I would take them to a pizza restaurant that catered to families with young children. I recall one arcade game at the restaurant that featured a padded mallet and six holes. When a puppet popped up through one of the holes, the object was to beat it down with the mallet. Of course as soon as you beat down one puppet, another would appear through another hole. As I recall, one could never win at the game, but the kids had fun trying. In many ways the Washington Estate Tax reminds me of that arcade game.
For years the Washington Estate Tax consisted of what we in the tax profession refer to a “pick up” tax. The federal estate tax law provided for a credit or reduction of the federal estate tax for estate taxes paid to any state, subject to a maximum credit as prescribed in the law. Washington, along with all of the other states, changed their estate tax law to simply “pick up” as the state tax the amount allowed in federal law as the state tax credit. It was free money to the state, cost little to administer, and did so at no additional cost to the taxpayer.
Congress changed the federal law to reduce the amount of the credit for state taxes. For deaths in 2005 and later there is no credit available for state taxes. For the states that relied on the “pickup tax,” that revenue disappeared. The Washington Department of Revenue took a different approach, but on February 5, 2005 the Washington Supreme Court invalidated the Department of Revenue’s position, resulting in the State of Washington having no estate tax. As this is being written the Department of Revenue is processing refunds to those estates that paid the tax under the invalidated interpretation.
On May 17, 2005 the Governor signed into law the new Washington Estate Tax. If the new law survives court and initiative challenge remains to be seen, but for estates of those who die on or after May 17 there my be a filing requirement and a tax.
Some important details of the new tax:
The tax is based on the federal taxable estate (under the Internal Revenue Code as it exists on January 1, 2005) without the deduction for state estate taxes, but providing for an exemption deduction of $1,500,000 for deaths before January 1, 2006, and $2,000,000 for deaths on or after January 1, 2006.
There is a deduction for the value of certain farm and timber property.
The marginal rates of tax range from 10% for Washington taxable estates of under $1,000,000 to 19% for taxable estates over $9,000,000.
The Washington estate tax does not expire when the federal estate tax is scheduled to revert to the old rules in 2011.
There is still much to be learned about the new law as the Department of Revenue issues regulations and other pronouncements, and taxpayers have their day in court, but there are several immediate planning points to consider:
Any Washington resident or other persons who have Washington property should immediately review their will and other estate planning documents to consider revisions in light of the new tax law.
Gifting is an important strategy under the new law. While the federal system integrates gift and estate taxes to some degree, Washington does not have a gift tax. A substantial gift, even at deathbed, may be made at little or no federal tax cost, but may save substantial state taxes. Of course the usual strategy of giving only high basis assets apply, or any state estate tax savings may be offset by future capital gains taxes.
Plans that incorporate a Qualified Terminal Interest Trust or other trust vehicles will need to be flexible. The new law did not incorporate those provisions, but left it to the Department of Revenue to promulgate appropriate regulations. This will tax time, and the content of those future regulations could differ substantially from the federal provisions.
People with out of state assets, or non-residents with Washington assets, will require special planning to avoid unintended consequences. As least one commentator has suggested that for some people that split their time between Washington and other states may consider moving their domicile to that other state.
Federal income or estate tax treaties with other countries that service to reduce or modify estate taxes will not apply to the new state tax.
The Washington State Department of Revenue’s initial commentary on the new law can by found at http://dor.wa.gov/Docs/Pubs/SpecialNotices/2005/sn_05_NewEstateTaxLaw.pdf