©2023. Published in the Puget Sound Business Journal, March 1, 2023. Reproduced with permission.
Just like in years past, 2023 brings changes to taxes on high-net-worth estates. This is especially important in Washington state, one of only 17 states with a state estate or inheritance tax, and in the Puget Sound area, where many individuals have accumulated wealth through high-paying jobs and appreciation of the real estate they own.
Let’s address the federal estate tax first. This year, the federal estate and gift tax exemption amount increased from $12.06 million to $12.92 million per individual. The estate of any individual who dies with a net worth under $12.92 million in 2023 will not have to pay federal estate taxes. The federal gift and estate tax exemption amount will continue to increase until 2025. After 2025, federal estate and gift tax exclusion amounts are set to decrease unless Congress passes new legislation. Additionally, the federal annual gift tax exclusion amount increased from $16,000 to $17,000 per individual in 2023, meaning individuals can gift that amount each year to other individuals without either having to pay taxes on it.
In contrast to the federal tax, the Washington state estate tax exclusion amount for 2023 remains at $2.193 million per individual, the same that it has been since 2018. The exclusion amount increased steadily each year between 2013 and 2018. Then, in 2018, these increases stopped. What happened?
Washington state estate tax basics
Washington has an estate tax that is imposed on the value of an individual’s estate based on the language in state law RCW 83.100. Gifts to charitable organizations reduce the value of an individual’s Washington taxable estate. Additionally, because Washington does not have a gift tax, lifetime gifts to individuals are not included in calculating the value of an estate for Washington estate tax purposes.
The Washington estate tax applies to the estates of Washington residents at the time of death and to the estates of individuals who are not Washington residents but who own property in Washington. For non-residents and Washington residents who own property outside the state, state law offers a formula to calculate the amount of Washington estate tax owed.
The estates of Washington residents and non-residents who owe estate tax will pay 10 percent to 20 percent, depending on the value of their taxable estate. The estate taxes collected by the Washington Department of Revenue are designated for education and directed to the state’s Education Legacy Trust Fund, which is used to support common schools, expand access to higher education through funding for new enrollments and financial aid, early learning and child care programs, and other educational improvement efforts.
Why is the Washington estate tax exclusion amount frozen?
The answer to why the Washington estate tax has not increased since 2018 resides in the definitions found in the state law that defines the “applicable exclusion amount” for Washington’s estate tax to be adjusted annually based on the consumer price index. That all seems well and good. The problem is that the law (RCW 83.100.020(1)(b)) defines “consumer price index” as “the consumer price index for all urban consumers, all items, for the Seattle-Tacoma-Bremerton metropolitan area as calculated by the United States bureau of labor statistics.” In 2018, the U.S. Bureau of Labor Statistics eliminated the consumer price index for the Seattle-Tacoma-Bremerton area and instead shifted to calculating the consumer price index for the Seattle-Tacoma-Bellevue area.
The result is that the applicable exclusion amount for Washington taxable estates is frozen at $2.193 million, unless new legislation updates the state law. As of this writing, no such legislation has been enacted. Washington residents with asset levels above the Washington estate tax exclusion amount should consult with an estate planning attorney regarding their estate tax planning options, which may include gifting, a testamentary trust funded on the death of a spouse, a combination of the two, or other options. In addition, it is important to regularly review any existing estate plan to account for changes in the law or one’s personal situation.
[Sherry Bosse Lueders is an of counsel attorney with the law firm Stacey L. Romberg, Attorney at Law. Reach her at www.staceyromberg.com.]
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.