Will my estate be taxable?

Estate and inheritance laws differ from state to state.  If you own property in more than one state, you may be subject to the tax claims of more than one jurisdiction.  Similarly, if you own property located in more than one country you may face tax treatment dependent upon the local laws and treaties.

 Estate and inheritance tax laws have been in a continuously volatile state for the past few years.  As of the time these materials are being revised, the United States imposes an estate tax on estates having a taxable value in excess of 5 million dollars (plus adjustment for inflation) for decedents dying this year.  Generally, gifts to a spouse and charitable gifts to qualified charitable organizations can be deducted from the value of the estate in determining the amount of the tax.  By careful planning, spouses can increase the amount that can pass tax free to $24 million with a top federal tax rate of 40% on estates over that amount.

Washington State imposes an estate tax on estates having a value of over $2 million (plus adjustment for inflation), and the top state estate tax rate is 19%.  This means that more Washington families will need to deal with a significant state estate tax than will deal with any federal estate tax.  Some states have no state estate tax at all, prompting some individuals to consider moving away from Washington State.  The key consideration here is that individuals should consider the specific tax rules of the jurisdictions in which they reside or own property, and how those rules will affect their specific estate plan.

Federal gift tax laws mirror the estate tax laws in defining the amount that can pass free from tax during one’s lifetime.  There are a number of exceptions to what is counted as a gift for these purposes, including an annual exclusion which is currently $14,000 per donee for each donor and certain gifts which don’t count at all when they are made directly to an educational institution for tuition or to a service provider for certain medical expenses.  But estate tax rules and gift tax rules differ in significant ways, including whether or not the tax basis of the gifted property is the same in the hands of the donee as it was in the hands of the donor.  Washington state currently has no gift tax, prompting some to make gifts during their lifetime to avoid state estate tax on estates of over $2 million, while not incurring any federal gift tax in that the value of their taxable estate for federal estate tax purposes remains below the taxable threshold.

Adding yet another level of complexity is the federal generation skipping transfer tax.  This is a significant factor for some families but is beyond the scope of these materials.  We suggest that the potential effects of this tax be considered with a qualified estate planner.