Estate Tax in Washington State: Protect Assets with Life Insurance

It may be expensive to live in the state of Washington, but it’s even more expensive to die here. Washington currently has the highest maximum estate tax in the country. In fact, between the state and federal taxes, as much as 60% of your after-exemption assets could wind up in the hands of the government, rather than going to your heirs.

For high net worth couples and individuals who live in Washington or own property there, this creates a serious problem. Most people who own assets that exceed their federal and state estate tax exemptions don’t own those assets in cash, but in property or other illiquid assets. If you’re among the those with high net worth, and you get hit with the 60% overall estate tax, there’s a pretty strong chance that your heirs are going to have to sell off a lot of your assets when that tax bill comes due. Hurried sales are often fire sales, which can greatly reduce the value of what you leave behind.

Lower Estate Tax Exemptions in Washington State

While you might be able to exempt $5.45 million of your assets from federal estate tax, Washington allows only $2,079,000 of exemptions for Washington residents or nonresidents who own property in the state. After the deductible amount, the state has a tiered estate tax structure that goes from 10% to 20%, as shown in the table below.

Taxable Estate After Exemption Tax Rate
From $1 to $999,999 10%
From $1 million to $1,999,999 14%
From $2 million to $2,999,999 15%
From $3 million to $3,999,999 16%
From $4 million to $5,999,999 18%
From $6 million to $6,999,999 19%
From $7 million to $8,999,999 19.5%
$9 million and above 20%

For the purposes of valuing the estate, all assets are considered at their fair market or actual value as of the date of death. Certain deductions are permitted, like deductions for surviving spouses, charitable gifts, and farming operations. The portability that is allowed under federal tax laws, which allows surviving spouses to use the remainder of the deceased spouse’s exemption for his or her own estate, does not apply. There is no portability for Washington spouses under estate tax law.

On the upside, while Washington does have the highest maximum estate tax in the nation, it doesn’t place an inheritance tax on beneficiaries like some states do. As a result, beneficiaries of your estate will receive anything you leave to them on a tax-free basis — after the state takes a pretty hefty bite out of those assets.

Planning Your Estate in Washington State

Planning your estate if you are a resident of or own property in the state of Washington is very important due to this high burden of estate taxes. Even if you’re within the federal exemption amount, the lower threshold in Washington means that it’s very likely those who own property there will have estate taxes to pay.

There are a few ways to work around this, with one of the main ones being that you can protect your assets through an irrevocable life insurance trust (ILIT). There are a few benefits to setting up an ILIT, including:

  • ILITs aren’t held in your name, so they are not added to your estate when you die.
  • They bypass probate, allowing beneficiaries to gain proceeds quickly for the purposes of paying the estate tax.
  • The proceeds from the life insurance policies are not taxable, either through estate or inheritance tax, when held in a trust.
  • By using annual gift tax exclusions, trust grantors can fund a significant legacy with a relatively small amount of funds.
  • ILITs are protected from creditors to the insured’s estate.

If you’re living in Washington state, or even if you just own property there, an ILIT is the best way to manage your estate. Otherwise, your heirs are going to face significant taxes, which will likely require that they sell off assets. Because ILITs are not part of your estate, they can be used as a pool of funds to cover your estate tax burden, both at federal and state levels.

Howard Kaye life insurance advisors have specialized knowledge in how to leverage life insurance policies held in trusts to discount the cost of the estate tax by up to 90%. This is a strategy we’ve been using for decades to help our clients pass on more money to their heirs to preserve their legacies. For more information on managing your estate tax using ILITs in Washington state, contact Howard Kaye or one of his life insurance advisors at 1-800-DIE-RICH.