An Estate Tax Overview
There’s an old saying out there that goes something like this:
There are only two certainties in life: death and taxes.
In this case those certainties happen at the same time.
At its most basic, an estate tax is a tax that you are forced to pay the government when you die. This tax is based on the value of the assets that are held in your name. The more assets you have, the higher the tax you pay.
Estate tax laws were intended to prevent wealth families from passing down their wealth from generation to generation, but the fact is, the only people that pay all of their estate taxes are those that fail to hire a good estate planning attorney.
The point at which you begin paying estate taxes changes every year. The assets that are not subject to the tax are said to be exempted (so when I talk about “exemptions” below that’s what I’m talking about).
In 2018 the federal estate tax starts at $11.2MM (i.e. you have an exemption of $11.2MM - everything under $11.2MM is not taxed).
In 2018 the Washington State estate tax starts at $2.193MM.
As you can clearly see, there is a big difference between the state estate tax threshold and the federal estate tax threshold.
But that’s not the only difference…
The Estate Tax You Pay is Different
I think it’s probably best to start with what matters most - the amount of estate tax you’ll actually be paying.
At the federal level you pay a flat 40% tax on everything over the exemption amount.
For example, if you died and your estate assets totaled $12.2MM (or $1MM over the exemption amount) the tax owed would be $400,000. I know, the tax gets really big really fast.
In Washington State you pay a graduated estate tax, based on your asset level (but it still gets really big really fast). Here’s how it breaks down:
• $0 - $2.193MM = no tax
• $2.193MM - $3.193MM = 10% (or $100,000)
• $3.193MM - $4.193MM = 14% (or $140,000 - and this is on top of the $100K)
• $4.194MM - $5.193MM = 15%
• $5.193MM - $6.193MM = 16%
• $6.193MM - $7.193MM = 17%
• $7.193MM - $8.193MM = 18%
• $8.193MM - $9.193MM = 19%
• $9.193MM+ = 20%
But that’s not the only bad thing about state estate taxes.
The way the system is set up, the estate tax that you pay to the state is not given a dollar for dollar credit against the federal estate tax. All you are given is a deduction on your federal tax return.
Another example: let’s say you’re estate is $20.193MM (the one great thing about the federal estate tax amount is that it is so high few people get there). When you die you will owe the following state estate tax (roughly) = $3.29MM.
If you calculated a straight 40% federal estate tax payment (after the exemption) you’d owe $3,597,200 in federal estate tax.
With a credit you’d be able to simply subtract the $3.290MM from $3.597MM and owe only $307,000 in federal estate taxes.
But with a deduction you subtract the tax from the total assets and then pay tax. So you’d take the total assets, $20.193MM and subtract the state estate tax owed, giving you a total of $16.901MM. Then you’d calculate your federal estate tax based off of that:
$16.901MM minus $11.2MM (the estate tax exemption), which equals $5.701MM. Now you take $5.701MM and multiply it by 40% to find out the tax owed, which equals $2.280MM.
As you can see, it’s a big difference (and big money).
Washington State Also Has No Portability
The fun doesn’t stop at the amount of tax you have to pay either.
They have done whatever they can to suck just that little bit extra out of you.
Before we get started it’s important to point out this only applies to MARRIED people. If you aren’t married, move on to the next section (or know this won’t apply to you until you tie the knot)…
No, portability has nothing to do with the quality of your water (I think that potability…). What I’m talking about is your ability to give your spouse your estate tax exemption with the check of a pen.
At the federal level, they have made an allowance so a spouse may “give” their estate tax exemption to their spouse by simply checking a box on a tax form.
This is known as portability.
And that’s why if you are married you now need assets in excess of $22MM before you owe any federal estate taxes (though that doesn’t mean you don’t need trust planning).
Unfortunately there is no portability in Washington State.
You can get away without paying any estate taxes when the first spouse dies (you can give as much as you want to your spouse without having to pay any tax), but when the surviving spouse dies, the tax starts at their individual level ($2.193MM).
There is a solution to this problem. It is possible to double your Washington State estate tax exemption to $4.386MM, but it’s going to take an estate planning attorney and a semi-complicated trust plan (called an A/B trust).
Estate Taxes Aren’t Going Away Any Time Soon
As with most everything else in life, this isn’t an issue that you can just run and hide from.
If you live in Washington State and your net worth is over $2.193MM (including life insurance, WA property, and the money in your accounts) you are facing an estate tax liability if/when you die.
The solution isn’t to run and hide, of course, but to hire an estate planning attorney that knows what they are doing to help you out.