The Washington State Legislature has approved new tax laws that change applicable Washington estate taxes in several difffent ways. This affects a large number of Washington residents. A summary of the relevant changes are provided below.
- Change to the Applicable Exclusion Amount: Currently, estates of Washington decedents with less than $2 million worth of assets, per person, are not subject to Washington state estate tax. The $2 million limit is known as the Applicable Exclusion Amount. On January 1, 2014, the $2 million Applicable Exclusion Amount began to increase with an adjustment for inflation, potentially exposing fewer estates to Washington’s estate tax.
- Change to the Tax Rates: Currently, any amounts in a Washington decedent’s estate in excess of $2 million are subject to Washington state estate tax at rates ranging from 10% to 19%. Effective January 1, 2014, the upper bracket was increased from 19% to 20%.
- Change to the Deductions: Currently, other than out-of-state real estate, all assets in a Washington decedent’s estate are part of his Washington taxable estate. Effective January 1, 2014, a deduction up to $2,500,000 is allowed for the value of a decedent’s Qualifying Family Owned Business Interest (QFOBI). This deduction is only available if (1) the qualified family-owned business interest exceeds fifty percent of the decedent’s Washington estate (before applying the Applicable Exclusion Amount), (2) during five of the eight years preceding his death, the decedent or his family owned and operated (or materially participated in) the business, (3) the decedent is passing his interest to a qualified heir, (4) the decedent was a US citizen or resident, and (5) the value of the decedent’s interest in the business is less than $6 million.If the estate meets the criteria above, it can claim the deduction. However, the qualified heir receiving the business interest is not out of the woods. For three years following the decedent’s death, the qualified heir (1) must materially participate or operate the business, (2) cannot transfer the interest to another party who is not a qualified heir or another owner, (3) must retain US citizenship, and (4) cannot move the business out of the United States. If the qualified heir fails to meet any of the foregoing requirements during the three year period, the qualified heir must pay a tax equal to the tax savings that was given to the estate.
We strive to keep you informed of changes in the estate and tax laws that may affect you. If you have any questions, please don’t hesitate to contact any member of our estate planning team.