Attorney James Jones: [00:00:00] Picture a Washington family thrilled to inherit their parents’, Seattle home and hard-earned savings only to be blindsided by a $50,000 tax bill they never planned for. That’s the reality of Washington’s estate tax, which kicks in at just 2.193 million. In today’s episode, taxes and Estate Planning, what you need to know, I’m sharing how to protect your legacy, whether it’s a cabin in clay, el, or a nest egg for your kids from unexpected taxes.
From trusts to simple gifting tricks, stick with me to keep your assets where they belong with your loved ones and not the tax man in Olympia.
You are listening to the legacy talk podcast hosted by James A. Jones, attorney at law and founder of sound legacy law, PLLC in Tacoma. Attorney Jones is here to talk about how to best protect your family assets and well, pulling stories from his more than 20 years of helping families and business owners protect their assets, create their estate plans, preserve their [00:01:00] wealth and plan for the future.
Nobody wants to think about estate planning, but life has a way of sneaking up on you and. And at any moment, something unexpected could happen that will leave you regretting not having acted sooner. So join attorney James A. Jones in the Legacy Talk podcast and together learn how to plan for your future today and have peace of mind tomorrow.
Attorney James Jones: Welcome to Legacy Stock. I am your host, James Jones. In today’s episode, we are talking about taxes and estate planning. What you need to know, it’s all about death and taxes, right? That’s what life’s all about. Not really. While estate taxes are not a sexy topic to talk about, it is a topic that matters to most families in Washington.
Most of the clients that I work with have an estate tax issue, or they’re close to having one. Most clients I meet say something like the following, I just need a simple will. You know, my estate’s not very big. It’s not [00:02:00] complicated, but the truth about this is when you consider your house, your life insurance, your retirement plan.
Most Washington families have a taxable estate, or they’re very close to it, right? I have lots of clients lose thousands of dollars on estate tax that they didn’t need to. Have they planned properly in advance. That’s why today’s topic is so important. You can’t plan for what you don’t know. So today we’re going to go through eight or nine or 10 talking points regarding the Washington state estate tax, state tax in general.
So that you know what to look for, what to consider when you’re doing your estate plan. So to start off with Washington’s estate tax, we’re one of the only states in the country that has its own estate tax. There’s maybe 10 of ’em, maybe not even that many, and we’re one of the lucky few to have our own estate tax and Washington’s estate tax exemption, which is the amount that can pass without going over and having to pay taxes 2.193 million.
That’s the adjusted inflation adjusted amount. [00:03:00] Currently in 2025, it goes up very, very, very slow. It started at 2 million several, several years ago, and it’s only at 2.193 now. So the rates on this tax are 10 to 20% as a graduated rate, and unlike the higher federal rate, which we’ll talk about.
This affects the vast majority of middle class families in Washington. If you have a house, if you have a retirement account, if you have life insurance based on the values of real estate and the stock market lately, and people that have been working and saving, you’re probably gonna have an, an estate that’s subject to estate tax are very close.
So picture, this is a scenario, right? You have a house worth 1.2 million, you have 800,000 in a retirement account or investment. I know, yeah, you have a 500,000 life policy. You may not even know you have a 500,000 life policy because it’s given by your employer or something like that. If you have that estate, you could owe a state taxes, which reduces what your heirs would receive, and you might not even know about it, right?
So first actionable tip today that we’re talking about is do your math, right? What’s your estate worth? What’s the net estate worth? Take [00:04:00] your house minus the mortgage. Take your retirement savings. Take your bank accounts. Life insurance and see what it’s worth. Where do you fall in that, you know, exemption amount.
So 2.193 million is what we’re looking for. And if you’re anywhere near that, you need to plan for it. You need to plan for it. Okay? Now the federal exemption is much different. The current federal exemption is 13.9 million or change per person in 2025. This is not set in stone, as with many. And I guess all probably taxes at the federal level, they’re subject to, you know, sunset provisions or being overturned by other taxes.
This one in particular is subject to a sunset provision that expires at the end of this year, 2025, and it’s scheduled to drop to about $7 million per person in 2026 unless it’s extended by Congress. And so if your estate’s over 7 million or in that range, then you’re also thinking about federal estate tax.
And so right now, if you have a very large estate in Washington, you can gift, you know, almost $30 [00:05:00] million without paying a state tax. And do that before it shrinks. Over the years, I’ve had many clients give large portions of their estate. There was one year, 10 or so years ago, 15 years ago, where there was no estate tax for a year.
So we had a lot of clients that sort of took advantage of that, or no gift tax, I should say, or estate tax. And they took advantage of that and made some gifts and saved some money in the long run. So if you start gifting now, you can save money and beat the deadline. And the good thing about that gifting idea is while Washington has an estate tax, the federal government has a gift tax and an estate tax that are tied together, which his all tied at that $13.9 million mark. And so you can gift quite a bit of money.
At the federal level, Washington does not have an a gift tax, so we don’t tax lifetime gifts here. So you can make unlimited gifts and reduce the taxable estate that you have. It’s not always great to gift. There’s issues to consider, like basis and taxation other ways if you make gifts, for example if you gift a piece of property that you bought for a hundred thousand but [00:06:00] now is worth 500,000, the person receiving that gift receives that property and if they sold it, they would be taxed on the difference between a hundred and 500,000 rather than if they inherited it, where they would be gifted or taxed on the amount that it’s worth at the time of the inheritance.
So there’s capital gains there, which may sometimes, and then in some cases are higher than the Washington state. Estate tax. So if you gift things, maybe make it cash, maybe make it things that have more fixed values. And instead of basis, which is a whole other topic, which we’re not gonna talk about because it’s complicated and boring.
So, but for example, you could make a plan where you gift like $50,000 a year, you know, to kids over five years reducing your estate by, you know a significant amount and reducing your estate taxes by correspondingly significant amount. There’s a new rule in Washington, which isn’t really that important.
It doesn’t matter that much. So when, married couple, the surviving first spouse dies of surviving spouse has what’s [00:07:00] called an unlimited marital deduction, there is a new rule where if your primary residence. Is incorporated in your taxable state, and that puts you over the 2.193 million. You don’t have to include the primary residence in determining whether you have to pay the tax or not pay the tax, but file the tax return.
You’re not paying the tax because there’s an unlimited marital deduction. So it’s really kind of a moot point. But it does save time and it does save money because one of the reasons that you wanna avoid a state tax in Washington is because you don’t want to have to file that stupid return. It’s a bear, it’s something that is not something that can be done like online as well as like a regular federal return.
And then in, for the most part, these returns are audited each one. And so it’s difficult to just filing the return costs a lot of money and time and hassle. And so if you don’t have to file, that’s good. So does the Washington State estate tax affect non-residents of Washington? Well, James, why would we worry about that?
I don’t live in Washington. Why would I worry about estate [00:08:00] tax in Washington? Well, you would if you owned a piece of real estate in Washington. And so say you’ve got a cabin, you might live in California where they don’t have an estate tax, surprisingly, shockingly, almost. But you’ve got a cabin up here, and if that cabin is of significant value, you could be paying tax on it. And so the other interesting caveat, and I’m not sure how this will be ever enforced or determined I don’t know, Washington looks at the worldwide gross estate of a non-resident in determining whether they have to file a return or whether they’re taxable.
So in some scenario you could say, well, the California resident had a $3 million estate, which included a million dollar Washington house. Even though the million dollar Washington asset is below the 2.193, they would still tax that at 10%. I haven’t ever seen any cases like this. I don’t know if it’s been challenged.
It’s something to consider and if you’re a non-resident, you’re probably not listening to this podcast, but it’s [00:09:00] something to consider if you have a taxable estate in another state or a tax, a larger state in another state if you have a house here. So maybe holding it in a different kind of entity might make sense.
We’re moving it out of Washington and buying it in another state that doesn’t have taxes. So how do we save these taxes? One way is to use an irrevocable trust. These are trusts that you can create and gift to during your lifetime. You can remove assets from your taxable estate, avoiding this 10, 20% estate tax.
It also avoids federal taxes. And so if you have an, an estate over 2.193 million, and I have appreciating access like a business or real estate or stock accounts or whatever. You can make gifts to an irrevocable trust where they would grow tax free and in certain situations you could maintain control over these assets, but it’s not something you’re gonna try to do on your own.
It’s not something that everybody’s gonna do, and most people aren’t going to do it. Okay? Most people with regular estates don’t [00:10:00] need to do something that drastic, which means give your stuff away for someone else to manage. Just to reduce estate tax, that’s not something you definitely need to do if you’re, you know, an average person with a smaller estate, which means probably under five or 10 million.
Okay. Another thing that’s different and interesting and important to know with regard to Washington’s estate tax is that it’s not portable. So the federal estate tax says, Hey, I’m gonna use my spouse’s credit for mine when I die later. Okay? I’m not gonna do anything about it now, but when I die, I’m gonna use my spouse’s credit too, so I’m gonna have $28 million or something.
Okay. Washington’s estate tax is not portable, which means if you die and don’t shelter your exemption in Washington. Your spouse can’t come back in later and say, well, with their $4 million state, for example, say they have a $4 million state, they can’t come back and say, well, what about my spouse’s [00:11:00] exemption?
We can’t we use that. That was half of hers or his. And Washington’s gonna say, no. Nope, sorry, you are out. That’s what they’ll say. Exactly like that. So the solution is to shelter the credit for the deceased spouse. So. We call that a credit shelter trust. This can be set up in a will or a trust. Usually I do ’em in a revocable trust as part of a revocable trust, but a credit shelter trust is a trust that can preserve the first spouse’s exemption, ensuring that both $2.193 million exemptions are used or available.
So basically for a married couple in Washington, it’s about 4.4 million or so, right? If you credit, if you shelter the credit, okay? If you do it right, if you don’t, you’re gonna be in trouble. Okay? So if you don’t have a credit shelter trust, and if you don’t have but you do have a taxable estate, then you’ve gotta do something about it, right?
You’ve gotta plan for it. And so it saves a lot of money, right? So say for example, you a $4 million estate, like we said in this scenario, and you put 2 million of it when the [00:12:00] first spouse dies, you put 2 million of it in a credit shelter trust, and then the surviving spouse dies with 2 million, which is less than 2.1, right?
They don’t have to pay a estate tax, but if they didn’t shelter that first spouse’s credit, then they’re gonna die with a $4 million estate. So they’re gonna pay tax on about $2 million, you know, which is a chunk of change. And so that’s a big savings. Okay, so how do we reduce the estate tax if we’re not willing to gift everything away or use a shelter trust or, I don’t have anybody to gift too.
You can deduct certain things like funeral expenses, estate administration fees. You can deduct debts that are paid. You can also deduct charitable bequests. So if you give a large sum of money to charities, those reduce the taxable estate that you have or the estate value you have dollar for dollar.
So, charitable giving is a good thing. So donating say $300,000 to a nonprofit in Washington via your will can reduce your taxable state by that amount. Right? And you can still support those you wanna support and not that help.
Now this is a [00:13:00] current bill I guess is close. They’re talking about always talking about increasing the exemption in Washington to 3 million and then maybe increasing the rate later the higher rate, over 10 million rate.
I’m not sure that’s gonna happen, but as far as estate taxes go, it’s easy to get around it. If you have a normal estate, even up to four or 5 million, it’s pretty easy to get around 6 million if you’re much larger. There’s other tactics and tools that we use to reduce the value of your estate, which are better usually than just putting everything in an irrevocable trust or gifting the to your kids.
’cause we don’t want to do that in most cases. So proactive planning, allowing you to like plan your gifts. Are we making any gifts? Are we going to do charitable requests when we pass? Or creating entities so we can move stuff around is better than just haphazardly doing it. And working with an experience attorney is important for that.
But you know, like everything, tax laws change, right? So we wanna make sure you’re looking at this regularly and if you’re [00:14:00] hearing things. About things going on in the legislature. Take a look, right? Or call your lawyer, right? Call me. We don’t wanna have Olympia, you know? Olympia. Decide how much we’re paying.
You know, if we can plan for it. Okay? Now, estate planning in general, but James, I don’t have anything set up. Well, if you have a taxable estate or you’re close to it, you really need to do it right. You really need to do it. I usually say that if your estate’s like one and a half million or so, you should put tax planning in because you’re in no time, you’re gonna be over two, right?
With real estate values going up, your investments going up, other things like that, you’re gonna be on the precipice of paying estate tax. So estate tax planning, if you’re in the one and a half million or higher range, is pretty smart. And so you wanna make sure you know what your life insurance pays out, right?
How much is your house? How much is your mortgage to that house? What do you have in your 401k or your iris or your investment accounts? So you wanna meet, with your lawyer to go over all this stuff, at least start something, right? You don’t have to have a full blown, [00:15:00] like revocable trust plan to have estate tax planning or to have an estate plan in general.
You don’t have to have, it’s a full blown plan, but. It’s important to consult with someone that knows what they’re talking about, right? And so, you know, this is an important topic that is not necessarily interesting’s, not something that people are thinking about for the most part, just because they don’t know. But estate taxes are a thing and Washington has one of the most relevant things in the country with regard to estate tax. Be happy you’re not in Oregon, ’cause their exemption’s only $1 million.
So imagine that. That’s insanity. So that’s it though for today’s episode. So think about your estate. If you have questions, let me know. Next week we will be talking about blended families and estate planning challenges. Just because there are challenges with blended families that are not as simple as families with just one set of kids.
Okay, but that’s all for today’s episode. I’d like to thank you for listening to today’s episode of Legacy Talk. If you’d like today’s episode, we’d like to learn more. Please liken subscribe for more great content. I’ve been your host, [00:16:00] James Jones, to your legacy.
Thank you for listening to the Legacy Talk podcast by attorney James A. Jones. If you found today’s episode helpful, we ask that you like and follow us on all major platforms so you don’t miss out on the latest episode. If you have questions for Attorney Jones, reach out at info@joneslegacylaw.com or visit our website at jones legacy law com.
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