Washington Estate Taxes – Planning for State-Level Peculiarities

This article was initially published in September 2024, but has since been updated to reflect the new 2025 laws. 

Back for more estate tax fun? Of course, you are! If you missed our dive into state-level estate tax particulars, please check out our other articles here.

Now, let’s move on to Washington, where the estate tax game comes with unique rules. You know the saying, “Nothing in life is certain except death and taxes.” Well, whoever coined that phrase hadn’t encountered the peculiarities of state-level estate taxes! While the federal estate tax tends to steal the spotlight—especially with whispers of 2025/2026 changes—it’s at the state level where many more families feel the pinch.

I’ve written about the federal estate tax and strategies in a few other places here on the Mission Wealth Insights blog (for background on the federal estate tax, check this article out!), but this article will focus more on one of the 13 states/territories that have an estate tax at the state level: Washington.

Washington vs. Federal Estate Tax: A Peculiar Match-Up

Washington’s estate tax has a significantly lower exemption compared to the federal level. While the federal estate tax exemption for 2025 is a cool $13.99 million, Washington’s is just $3 million per person. The state passed a new law in 2025 to increase this exemption from its previously lower $2.193 million. Going forward, this number will also increase with inflation.

The law change didn’t only increase the exemption amount – the estate tax rates have also increased. These changes will go into effect on July 1, 2025. Washington has eight—yes, eight—estate tax brackets, ranging from 10% to 35%. Let’s take a quick look at how the rates break down:

*Value in excess of the exemption.

The increase in exemptions and rates means different things for different people.  For someone with an estate valued at $2,750,000, this is a significant change – they’ve gone from having a taxable estate and owing taxes at their death to owing none at all! On the other end of the spectrum, a client with a larger taxable estate will now owe more in taxes. Under the new rules, someone having an estate at death valued at around $9,000,000 will now owe more in taxes than under the old rules. And going further down the spectrum, for a client with both a state- and federally taxable estate, they could now pay a top combined estate tax rate of 75% (WA’s top rate of 35% and the Federal rate of 40% before adjusting for any deductions, expenses, etc.). 

Washington also differs from the federal estate tax in that the $3,000,000 exemption is not a figure that can be combined with the surviving spouse’s exemption.  In Washington, just like at the federal level, one spouse can transfer assets to the surviving spouse without triggering any estate tax complications – this is called the “unlimited marital deduction.”  However, at the federal level, if one spouse has an excess or unused exemption, the surviving spouse can file for “portability” and combine it with their own.  In Washington, you can’t.  It’s a use-it or lose-it offering. 

Special Washington Deductions: Farms, Businesses, and Timberlands, Oh My!

Washington also offers two unique deductions. First, there’s the Estate Tax Farm Deduction, which allows certain farms and timberlands (including land, structures, and equipment) to be deducted from the taxable estate. Second, the Qualified Family-Owned Business Interest Deduction lets estates knock off the lesser of the value of the qualified family-owned business or $2,500,000 from the estate’s taxable value.  There are significant rules around qualification, but assuming max estate tax rates, this deduction can save up to $500,000 of estate tax!

Washington Capital Gains Taxes

The law changes in 2025 didn’t focus only on increasing the estate tax exemption and rate. Washington recently imposed a long-term capital gains tax, which was subsequently challenged in court and upheld.  The capital gains law provided for a $250,000 exemption, adjusted for inflation. Initially, the capital gains tax was a flat 7% rate.  Under the new law, an additional 2.9% surcharge applies to capital gains exceeding $1,000,000. The capital gains tax changes are also retroactively applied to January 1, 2025.

Planning Strategies for the Washington Estate Tax

Now that we’ve covered the basics, let’s discuss strategy. There are several ways to effectively plan for the Washington estate tax and limit your potential future tax liability. 

1. Exemption Planning with Trusts

As previously mentioned, unlike the federal estate tax exemption, the Washington exemption is not a combined tax credit. This means that for a married couple, the design of your estate plan needs to be different to utilize each of your potential $3,000,000 exemptions effectively.

For example, suppose Sam and Annie have settled in Seattle. They have 2 adult children to whom they would like to leave their estate. Sam and Annie have worked hard, lived within their means, and made informed investment decisions with the help of their wealth management team. Their total net worth is $8,000,000, and they’ve been responsible in their estate planning. Their estate plan leaves all their assets to the surviving spouse at first death and the balance to their children once they’ve both passed. However, this plan has a hidden danger as it does not include setting up a Credit Shelter Trust at the first spouse’s death. 

When Sam passes, his estate is administered as planned, and everything continues in Annie’s name. Because Sam left everything to his spouse, no estate tax has been triggered in Washington. Sometime later, Annie passes away, and the tax kicks in. Because Annie’s estate is valued at $8,000,000, her estate must file an estate tax return. Her estate would receive a credit against the first $3,000,000 of the estate and then pay taxes on the remaining $5,000,000. Annie’s estate would owe $840,000 in taxes. The remaining $7,160,000 would be transferred to their children.

The results look different if their plan called for a Credit Shelter Trust to be funded at the first death. At Sam’s death, $3,000,000 would go into this irrevocable trust for Annie’s benefit.  Annie could continue to use the assets in the trust as she needed. This also would reduce Annie’s net worth to $5,000,000. Then, at Annie’s death, her taxable estate (after using her exemption) would be $2,000,000, resulting in a tax bill of $250,000. By setting up a Credit Shelter Trust, they could shave $590,000 off their tax bill. And any appreciation in the trust is safe from future estate taxes—win-win!

It’s important to note that careful planning includes being aware of beneficiary designations on accounts. Beneficiary designations can allow for a smoother transition of assets at death but can also undo any careful threshold planning done in revocable trusts. Beneficiary-designated accounts override anything in a Trust or Will, so even if your plan calls for setting up a Credit Shelter Trust at the first death, the beneficiary-designated assets will not get picked up by that careful planning.

2. Gifting

Washington has no gift tax, so gifting during your lifetime is a great way to reduce your taxable estate. Remember the federal annual gift limit of $19,000 per recipient (2025). You can exceed this amount in a few ways – payments directly to providers for qualified education expenses and/or qualified medical expenses don’t count toward that $19,000 figure, and if you are thinking of funding 529 plans, you can fund up to 5 years’ worth of annual exclusion without using any of your federal exemption. If you give more than that to someone, you must file a federal gift tax return. 

Washington, just like at the federal level, includes any gifts more than your annual exclusion that occur within 3 years of death. 

3. Changing Residence

Yes, it sounds drastic, but relocating to a state without an estate tax could be a game-changer. Other than Oregon and Hawaii, every state west of the Rockies has no estate tax. However, packing your bags doesn’t free you from Washington’s grasp—at least not if you leave certain assets behind. The state has a complex formula for taxing non-residents based on the value of Washington-based property, so plan carefully if you’re thinking of becoming an estate tax escape artist.

Residents pay estate taxes on their whole taxable estate, though if they have out-of-state property, the estate tax is owed because the value of these assets is apportioned out. 

For non-residents, there is a multi-step process for determining your estate tax liability. You typically see this come up when someone leaves Washington but continues to own assets in the state. There’s a multistep process then for this class of individuals. You’d first determine your estate tax liability if you were a resident. You would prorate that estate tax liability by the proportion of your gross estate in Washington to the total value of your estate. 

For example, take the example of Sam and Annie from above. Assume they moved to Idaho before they passed, but kept a $500,000 cabin in Washington. Once they both pass, their estate would calculate their estate tax liability if they were residents – in this case, $840,000. Then, they would calculate the portion of their estate in Washington – $500,000 for the cabin out of $8,000,000 or 6.25% of their total estate. Finally, they’d multiply $840,000 times 6.25%, and the resulting $52,500 would be their final Washington estate tax liability. 

Business Interest Estate Tax Liability

Intangible assets have been a changing piece in the Washington estate tax calculation for non-residents. Business interests, most commonly LLC ownership interests, are intangible assets in Washington. However, for estate tax purposes, Washington has previously included Washington-based real estate owned by an LLC as a taxable asset if the LLC did not have a valid business purpose. However, in May 2020, the Washington Department of Revenue issued a special notice that they would no longer apply the “true business purpose” test to business entities going forward. This means that a non-resident who owns several rental properties in Washington can significantly improve their tax situation by holding those assets within an LLC rather than outright.

4. Charitable Giving

Want to reduce your estate taxes and feel great about it? Charitable donations reduce your taxable estate dollar-for-dollar, making them a powerful tool for reducing taxes while making an impact.

5. Life Insurance

Another way to manage estate taxes is through life insurance. There are specific rules around ownership of these policies to prevent the proceeds from being taxed to your estate. Still, with proper planning, life insurance proceeds can help cover any Washington estate tax liability without cutting into the inheritance you leave to your loved ones.

Washington Outlook

Washington residents should think about estate tax planning now, not later. At Mission Wealth, we’ll continue to monitor developments in Washington and at the federal level for our clients and any potential impacts on them.  If you have any questions, please contact our Wealth Advisory and Strategy team today.

This article is not intended to provide any specific tax or estate planning advice. Advisory services are only offered to clients or prospective clients where Mission Wealth and its representatives are properly licensed or exempt from licensure. Consult a tax professional or attorney for specific advice.