Chapter 7.5 The Washington State Transfer Tax System

• Jurisdiction: Washington

§7.5 THE WASHINGTON STATE TRANSFER TAX SYSTEM

Washington's stand-alone estate tax applies to decedents dying on or after May 17, 2005. Laws of 2005, ch. 516 (codified at Chapter 83.100 RCW). A Washington estate tax return must be filed if the decedent owned property located in the state of Washington and the decedent's gross estate exceeds the applicable exclusion amount (described below). RCW 83.100.050(1). Like the federal estate tax return, the Washington estate tax return must be filed within nine months of the decedent's death. See RCW 83.100.050(2). Even if no Washington estate tax is due, all estates that are required to file a federal return must also file a Washington estate tax return. RCW 83.100.050(1)(a).

(1) Generally adopts federal transfer tax rules

The Washington estate tax is calculated with reference to the decedent's "Washington taxable estate," which is defined as the decedent's taxable estate for federal estate tax purposes (with reference to the federal estate tax laws in effect as of January 1, 2005) after making adjustments. See RCW 83.100.020(15). First, marital deduction property included under I.R.C. §2044 must be added to the federal taxable estate (regardless of whether the first spouse died prior to the enactment of the stand-alone estate tax), unless the estate of the first spouse made a Washington QTIP election, in which case that amount must be added to the taxable estate. Then, deductions may be made. Primarily, the applicable exclusion amount must be subtracted. RCW 83.100.020(1). For estates of decedents dying after January 1, 2006, and before January 1, 2014, the applicable exclusion amount is $2 million. For estates of decedents dying after January 1, 2014, the applicable

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exclusion amount is indexed for inflation based on the consumer price index for the Seattle-Tacoma-Bremerton area, but it will never decrease in the event of a negative inflation rate. RCW 83.100.020(1). The Department of Revenue recalculates the applicable exclusion amount each year. For estates of decedents dying in 2018 and later, the applicable exclusion amount is $2,193,000. Note, however, that the Seattle-Tacoma-Bremerton consumer price index is no longer in use. Until the legislature amends RCW 83.100.020(1)(b), the applicable exclusion amount will remain at $2,193,000.

Comment: Note that portability does not apply to the Washington estate tax—the applicable exclusion amount does not include any unused exclusion from a predeceased spouse.

Then, the amount of real or tangible personal property used primarily for farming purposes is subtracted. RCW 83.100.046. Additionally, the amount passing to or for the benefit of the surviving spouse is subtracted as part of the marital deduction. RCW 83.100.047. Finally, the amount of real or tangible personal property used in a qualified family-owned small business is subtracted, subject to limitations described below. RCW 83.100.048.

Comment: Generally, any elections and valuations made on the Washington estate tax return must be consistent with the elections and valuations made on any required federal estate tax return. It is possible, however, for the decedent's personal representative to elect a different QTIP election amount on the Washington estate tax return than is elected on the federal estate tax return. RCW 83.100.047. Any inconsistent elections must be made on Addendum #1 to the Washington estate tax return.

(a) No state gift tax

There is no gift tax in Washington, which gives individuals ample planning opportunities to escape Washington estate tax through lifetime gifts. For example, assume that D is unmarried and has an estate worth $3 million. D has not made any lifetime gifts, but has been diagnosed with a terminal illness that gives him 30 days to live. If D dies with the $3 million estate, the estate will not be subject to federal estate tax, but the amount above the applicable exclusion amount will be subject to Washington estate tax. If D dies in 2019, when the applicable exclusion amount is $2,193,000, and ignoring any other deductions, then $807,000 will be subject to Washington estate

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tax. As shown in the rate table below, D's estate would be taxed at the 10 percent rate and would owe $80,700 in tax.

Now assume that when D receives his terminal diagnosis, D makes a $1 million gift of cash to his son. D would need to file a federal gift tax return (IRS Form 709) to report the gift, but no gift tax would be due, as D would simply chip away at his federal unified credit. At D's death, D's estate is now worth only $2 million. D's estate would be below both the federal and Washington applicable exclusion amounts and no estate tax would be due.

Comment: Washington's estate tax rates may be lower than federal capital gains or income tax rates. Therefore, depending on the assets, it may be more advantageous from an overall tax standpoint to not make deathbed gifts and instead pay Washington estate tax to obtain a step-up in basis at the decedent's death.

(b) No state generation-skipping transfer tax

Prior to May 17, 2005, Washington imposed its own generation-skipping transfer tax, former RCW 83.100.045. The same legislation that enacted the stand-alone estate tax repealed the Washington state GST tax effective on the estates of decedents dying on or after May 17, 2005. See Laws of 2005, ch. 516, § 12(2). The planning considerations for the absence of a gift tax in Washington would also apply to the absence of a generation-skipping transfer tax in Washington.

(2) Tax rates

Once the Washington taxable estate is computed, the tax is determined with reference to the following rate table found at RCW 83.100.040(2)(a):

If Washington Taxable		The Amount of Tax Equals		Of Washington Taxable Estate Value Greater than
Estate Is at Least	But Less Than	Initial Tax Amount	Plus Tax Rate %
$0	$1,000,000	$0	10.00%	$0
$1,000,000	$2,000,000	$100,000	14.00%	$1,000,000
$2,000,000	$3,000,000	$240,000	15.00%	$2,000,000
$3,000,000	$4,000,000	$390,000	16.00%	$3,000,000
$4,000,000	$6,000,000	$550,000	18.00%	$4,000,000
$6,000,000	$7,000,000	$910,000	19.00%	$6,000,000
$7,000,000	$9,000,000	$1,100,000	19.50%	$7,000,000
Above $9,000,000	$1,490,000	20.00%	Above $9,000,000

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(3) Definition of transfer

RCW 83.100.020(14) defines transfer as the term is used in I.R.C. §2001 and includes any shifting upon death of the economic benefit in property or any power or legal privilege incidental to the ownership or enjoyment of property. This legal fiction was created by the legislature in response to litigation that was commenced in 2012.

The 2012 case, Clemency v. State (In re Estate of Bracken), 175 Wn.2d 549, 290 P.3d 99 (2012), more commonly known as Bracken, involved two widows (Bracken and Nelson) whose husbands both died prior to May 17, 2005, when Washington's stand-alone estate tax became effective. The two estates were consolidated for purposes of the litigation. Both husbands had created marital trusts for their wives and made a federal QTIP election with respect to those assets. Accordingly, both husbands paid no estate taxes at their deaths. Neither of the husbands...