Estate Taxes Generally
An estate tax is a tax imposed on the transfer of the “taxable estate” of a deceased person, whether such property is transferred via a Last Will and Testament, Revocable Living Trust, other Will substitutes, or according to the state laws of intestacy.
Federal and state estate tax may be due on your estate if your gross estate is greater than the federal or state thresholds. The gross estate is the current market value of property you own including: cash and securities, real estate, trusts, insurance, annuities, retirement accounts business interests, and tangible personal property. The estate tax due is calculated based on the taxable estate which is the gross estate minus specified deductions such as debts on estate property and property transferred to a surviving spouse or qualified charity.
At both the federal and state level, there is an unlimited marital deduction to surviving spouses inheriting from the decedent spouse. Thus, any assets passing to the surviving spouse will pass estate tax free.
A. Federal Estate Taxes
The federal estate tax threshold amount for year 2019 is $11.4 million. Thus, at your death you are allowed to pass on $11.4 million estate tax free at the federal level. This amount is indexed for inflation and will likely increase each year.
By way of background, here is a brief description of recent changes to the federal estate tax. On January 1, 2013, the federal estate tax law underwent a couple of important changes. The exemption was slated to return to $1,000,000 and the top tax rate was to revert to 55% at the beginning of 2013. Instead, Congress passed legislation such that the exemption would remain at $5.0 million which is indexed for inflation. Then in December 2017, Congress passed tax legislation that doubled the baseline exemption amount from $5 million to $10 million, indexed to inflation. Thus, as stated above, the exemption for 2019 is $11.4 million. The estate tax rate is 40%. That means that every dollar after $11.4 million is taxed at 40%. The increased exemption expires at the end of 2025.
For married couples, the surviving spouse can make a “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount. This will effectively allow married couples to pass $22.8 million on to their heirs free from federal estate taxes with absolutely no planning at all.
The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person’s life; the gift tax prevents avoidance of the estate tax should a person want to give away his or her estate.
All of the above changes have been made “permanent” up until the time Congress decides to change them again. At that time, you will need to review your estate planning strategy to ensure that your plan reflects current law.
B. State of Washington Estate Taxes
The State of Washington estate tax threshold amount for year 2019 is $2,193,000. Thus, at your death you are allowed to pass on $2,193,000 estate tax free at the State of Washington level. This amount is indexed for inflation and will likely increase each year. The tax rate is a graduated rate beginning at 10% and increasing to a maximum of 20%.
A Washington State Estate Tax Return must be filed and estate tax may be due if the gross estate is greater than $2,193,000. Thus, it is important for those individuals or married couples whose estate is near or over $2.0 million to review their estate plan. Retirement accounts and life insurance death-benefit values are included when valuing a person’s estate for estate tax purposes.
The amount of taxes owing will depend on the year of the second spouse to die, the value of your estate, and the tax law in place at that time. Each spouse will be able to pass $2,193,000 on the state level for 2019. Whether you pay taxes depends on the year of the death of the second spouse.
Some Washington residents decide to locate their principal residence in another state where there is no estate tax. You have to comply with residency laws to ensure that you formally become a resident of another state. At that point, the only assets Washington can tax at the death of the second spouse is real estate located in Washington. If the net value of the real estate located in Washington is below the threshold amount (currently $2,193,000) then no estate taxes are owing. This is sometimes the simplest solution for some Washingtonians if they do split their time between two states.