#RichLifeLawyer Show 029: Washington Estate Taxes Explained
Washington Estate Taxes Explained
I get asked about this all the time, so I thought it was about time I broke this down for you.
The estate tax system in Washington State, at it’s core, is pretty simple.
If you die and your estate has more than $2,012,000 in it, then you start paying taxes.
It used to be a flat, cool two million, but they decided to start adjusting for inflation.
That means if you read this after 2016 there’s a good chance it’s going to be a little bit higher.
What Counts for Washington Estate Taxes?
Here’s what counts in calculating your assets:
Okay, I’m just kidding, sort of. Here’s a short list:
- Real estate:
- Investment accounts;
- Retirement accounts (401K/IRA/Pension/etc.);
- Bank accounts;
- Personal property; and
- Life insurance
The big one that people often forget is life insurance.
And it’s this big one that makes it really easy to get to $2 million net worth.
Washington Estate Tax Payment Schedule
This is actually a little bit difficult to explain using words (and even pictures are kind of confusing, but I’ll do my best.
1. You don’t pay anything on the first $2 million;
2. The first $1 million that is taxed goes at 10%
An example usually works good here.
Let’s say Mary dies with $3 million dollars in assets. The first two million transfers to family tax free. The remaining one million is taxed at 10%, or $100,000 (can you see why you might want to talk to an estate planning attorney to avoid this?!)
3. The next $1 million is taxed at 14%
This is where things get a little trick (just a little).
Continuing with Mary, let’s say she had an extra $1 million in life insurance that she’d forgotten about. That one million (or that amount from three to four million in her estate) would be taxed at 14% or $140,000.
Add that to the $100,000 you already paid on the first million to be taxed and you are now at $240,000 in taxes!
4. The next $1 million is taxed at 15%
Can you see where this is going?
With each million up to $9 million you go up 1% for a total of 19% (i.e. everything over $9 million is taxed at 19%).
You Can Significantly Reduce Your Estate Taxes
Just wanted you to know that reducing your estate taxes IS possible.
But that’s a topic for another blog post…
P.S. I’ve created a FREE report: 7 Estate Planning Mistakes Every Family Needs to Avoid. To access the report click here.
Christopher Small is a Seattle estate planning attorney who helps people get rich and live forever. He is also the owner of CMS Law Firm LLC.
Washington State Estate Taxes Transcript
Hey everybody welcome to episode twenty nine of the Rich Life Lawyer show I am your host as always Christopher Small. The owner of CMS Law Firm estate planning attorney extraordinaire or wanna be. Depending on who you talk to. But nevertheless, I am here to talk to you today about estate taxes at least in Washington State by the way. So I have to give myself a little caveat here. You know we are talking about estate taxes in Washington State. The reason for that is that Washington state has its own state estate tax that is much lower than the federal amount and we’re going talk about that in a minute. But before we even talk about estate taxes. We need to talk about what your estate is comprised of. A lot of people don’t understand what makes up their estate and so they believe they have way way less assets than they really do. So let’s talk about that. Your estate basically comprises of everything that you own of value, okay. So that the easy ones right are like your home, the value that’s in your home, bank accounts, retirement accounts, cars, personal property, jewelry, anything like that. All of that counts.
But what also counts is life insurance. What also can count is your pension which would consider current retirement accounts. But in Washington State in Seattle in particular it’s pretty easy to get up to that threshold, that two million dollars threshold before you start to pay estate taxes. Think about like this. My wife and I, we own a home probably has I don’t know, couple a hundred grand in equity at least. Probably more since the real estate markets just being on crazy. We both have life insurance policies of, I don’t know a million bucks a piece probably. I don’t know what the exact number is. We have retirement accounts. You know I own a business. We have cars, we have things, right. So getting to two million dollars happens pretty pretty quickly. And once you do that, that’s when the estate taxes start to begin. Now, why do we even have estate taxes. A couple of reasons. The main reason if you talk to the government is that they want to try to prevent the hoarding and building up of wealth in families so they want to eliminate or reduce the possibility of passing along enormous vast sums of money to people and then those people not just not having to do anything forever.
Think about you know maybe like the Rockefeller’s or the Carnegie’s or the Carnagie’s depending on who you ask or you talk to or you listen to. You want to try to prevent that continuing succession of wealth and distribute it amongst the people. The second reason is that you know it’s an easy way for the government to get some money, right. Because you’re dead. So they will, you know there’s not really a lot of people to complain at that point. Your heirs obviously but it’s an easy win for them. So, and it’s rich people too, right. So we’re talking about taking money from people that are over two million dollars net worth. That is actually a relatively large segment of the population but when you compared to everyone else, we compared to the rest of the world, it’s very very small part of the population. So let’s talk about these taxes real quick. The way that taxes work in Washington State, it’s kind of stepped up depending on where your net worth is. So from zero to two million, you don’t owe any estate taxes. Once you get from two million to three million, you have to pay a ten percent tax. So if you have three million dollars in net worth, then you are going to be paying a hundred thousand dollars to Washington State for your estate taxes. \
The simple math at least. Once you get to between three million and four million dollars of net worth on that and it’s going to get confusing but you’ve got to imagine that for each million dollars, there’s a different tax amount. Okay, so from two million to three million dollars, it’s a ten percent tax. From three million to four million, it’s a fourteen percent tax. From four million to five million, it’s a fifteen percent tax but only on that one million dollars. Okay, so for example. If you have four million dollars, from two million to three million, you’re paying ten percent. So one hundred thousand dollars. From three million to four million, you’re paying fourteen percent. So on hundred forty thousand dollars. So if you have four million dollars of net worth. You’re paying two hundred and forty thousand dollars in taxes. Yikes. So it gets pretty big pretty fast. Then, once you get from four million, and once you get to five million, on that next million dollars you’re paying fifteen percent tax. So you would go up on five million dollars, you’d be paying three hundred and ninety thousand dollars in taxes. And once you go from five to six, then all sorts of crazy starts to happen because not only do you have to pay tax in Washington State because you’re going to pay federal estate tax too. That’s no good.
Okay? So, part of what I try to do is strategize with clients to either reduce what that net worth number is at the end of your life or do some other estate planning strategies to move the money around to make sure that it’s not counted or that it doesn’t have to be paid when estate tax time comes. But that’s sort of a very general breakdown of the way that the estate taxes work. They’ll be more to come later. I’m trying to give these like one step at a time. Start with the basic stuff and then get them after that. But just know if your estate’s over two million dollars, you are potentially looking at some payment to the man, right. So, I think it’s gonna be it for today. Hope you enjoyed this episode of the Rich Life Lawyer Show. Once again I’m Christopher Small, CMS Law Firm. If you have a question, if you want me to answer a question here on the show, e-mail me firstname.lastname@example.org call me (206) 659-1512. I’d love to hear from you and I will definitely answer your questions. Talk to you soon. Bye.