2025 Estate Planning Update—It's Time for Spring Cleaning!

By Ellen S. Jackson | Related Practice: Estate Planning & Administration

“The only certainties in life are death and taxes.” We’ve all heard this oft-repeated adage, but over the past few decades, the federal estate tax system has undergone significant changes, some permanent and some temporary. With all the changes, the future of the federal estate tax is anything but certain. For Washington residents, add our own state estate taxes to the picture, and it becomes even more complex. Implementing an estate plan that addresses the intricacies of state and federal law and captures your wishes is more important than ever.

When did you last review your estate plan? If it’s been more than a few years since you’ve looked at your plan, or if you haven’t yet created an estate plan, this three-part article will help you understand the current landscape of federal and Washington State estate tax laws and provide you with some practical tips for creating your plan or reviewing your existing plan to see if an update is warranted. 
   

What Is Estate Planning? What Do I Need to Know?

• An estate plan usually includes a few key documents—the “basics” are: a Will, financial and medical powers of attorney, and a health care directive. Sometimes people choose to use a Revocable Living Trust as a replacement for a Will.
• A Will or Revocable Living Trust tells us where assets go, how taxes are paid if tax is due, and who is in charge of making decisions and carrying out estate administration.
• Creating and maintaining an estate plan should be a priority for anyone who:
  • Has young children;
  • Wants to make sure a family member who has a disability is taken care of;
  • Has a blended family;
  • Is in a long-term non-marriage relationship with a partner;
  • Wants to disperse assets to beneficiaries over time instead of all at once;
  • Owns a business and wants to ensure the business can continue or is wound down in an orderly way if the owner dies or becomes incapacitated;
  • Wants to direct money to a charity, a church, or other favorite causes after death;
  • Wants to distribute assets unequally among your children, or to omit a child entirely. 

Updates and Changes to the Law:

Washington State Estate Tax

• Washington imposes an estate tax on residents of Washington (which may also apply to non-Washington residents who own real property), but Washington does not have a gift tax.
• Compared to federal estate taxes, Washington's estate tax exemption is lower, but the tax rates are lower, and there is a graduated rate table, instead of a flat rate like at the federal level.
• For now, the filing threshold remains at $2,193,000 per person.
• A recent change is that for some families, the need to file a Washington estate tax return upon the death of the first spouse may not be required.
  • Remember this only applies in limited circumstances outlined in our post, "Estate Tax Alert: New Washington Estate Tax Spousal Personal Residence Exclusion" (e.g., when the decedent's estate (after excluding the value of the primary residence) is under the filing threshold AND no elections need to be made AND the entire estate goes to the surviving spouse).
  • Importantly, this change does NOT port or transfer the first spouse's Washington estate tax exemption to the surviving spouse.
• There are a few potential changes which are pending before the state legislature, including raising the filing threshold and re-indexing the threshold to take inflationary adjustments into account. These changes have not been enacted yet, and it seems unlikely the current legislative session will do so. These proposals, however, give us some insight into ways the legislature may consider making changes to the estate tax laws in the future.

Federal Estate Tax

• At the federal level, there is both an estate and a gift tax, and these taxes are closely related.
• Compared to Washington estate taxes, the federal per-person estate tax exemption is larger, but the rate of tax is higher—a flat 40% once assets exceed the exemption.
• In 2017, during the first Trump administration, the Tax Cuts and Job Act (TCJA) was enacted. The TCJA temporarily doubled the per-person federal estate tax exemptions, from a base of $5 million per person to a base of $10 million per person (both subject to inflationary adjustments).
• With accounting for inflationary adjustments, in 2025, the current per-person exemption is $13,990,000.
• Unless Congress acts, the currently high exemptions are scheduled to sunset at the end of 2025 and revert to the pre-TCJA levels.
• The scheduled reduction in the federal exemptions puts people who have made significant gifts in the past (meaning those who have reported gifts of at least $5 million on previous gift tax returns) and still have substantial assets that they might consider gifting in a “use it or lose it” situation—meaning there may be a limited window to make additional gifts, and this window may close permanently at the end of 2025. Of course, if the current high exemptions are extended or made permanent, then the “use it or lose it” urgency will dissipate.
• It is currently unclear what legislative priorities are and what laws Congress and the President will ultimately be able to enact.
• For clients who have no remaining gift tax exemption or are not ready to gift remaining assets to take advantage of the “use it or lose it” gifting, sales of assets may be an option to discuss with their advisors.

Retirement Accounts/IRAs: The SECURE Acts 1.0 and 2.0

• Starting in 2019 and again with the passage of SECURE Act 2.0 in late 2022, sweeping changes to rules for Required Minimum Distributions (RMDs) were made. The most significant changes are:
  • Stretch IRAs are gone: Non-spouse, non-disabled adult beneficiaries ( e.g., your typical adult children beneficiaries) generally need to distribute (and pay the attendant income tax) on IRAs within 10 years of the death of the original IRA holder (called the “participant”).
  • The age when RMDs begin: Through 2022, RMDs generally started once the participant reached age 72 (up from age 70 ½). Then in 2023, the age at which RMDs began was increased to 73. Beginning in 2033, the age for starting RMDs is set to increase once again, to age 75.
  • Anyone who was already required to begin RMDs under the old laws still must take RMDs, but this allows a set of younger retirees a little more time to continue building with tax-free growth in their IRA.
• Another recent change was to make qualified charitable distributions (QCDs) a permanent feature of retirement planning, and to index QCDs for inflationary adjustments. In 2025, up to $108,000 of an RMD can be distributed directly by the IRA custodian to the participant's designated charity, and this amount is not included in the participant's income for that year. QCDs are a great solution for IRA owners who are already charitably inclined and want to make the most of their charitable donations. Consider your RMD the first source to make charitable donations, since the amount of the QCD is not included in taxable income for the year. One drawback is that QCDs cannot be directed to a donor-advised fund.
• If you have a sizable IRA and are inclined to provide for a favorite charity at death, consider directing your IRA to charities. Providing for charities through retirement accounts often makes for good estate planning since the charity can receive the IRA funds at your death without incurring the attendant income tax that your children or other individuals typically would. And your estate may realize the benefit of a charitable estate tax deduction.

Conducting Your Estate Plan Check Up:

Take a few minutes to ask yourself these questions and review your current documents:

• Have you experienced major life changes?
  • Marriage, divorce, or entering a long-term, committed non-married relationship? The birth or adoption of a child, or the death of an immediate family member?
  • Have your assets greatly increased or diminished in value since your last estate plan?
  • Have you moved to a different state or bought real estate in another state, such as a vacation/second home or vacation rental real estate?
• Review your existing documents:
  • Do your powers of attorney designate the right people as Agents to make medical and financial decisions for you if you become incapacitated?
  • Does your Will or Revocable Living Trust designate the right person as Personal Representative or Successor Trustee? Are the right people nominated as Guardian of minor children?
  • Does the substance of your Will or Revocable Living Trust still fit? Do assets get to the right beneficiaries? Have your wishes changed regarding your family; do you want to add new beneficiaries such as charities?
  • Have you made a list that directs tangible personal property items to certain individuals or charities?
  • If you use a Revocable Living Trust, have you conveyed all of your property (real estate and financial accounts) to your Revocable Living Trust?
• Review your Beneficiary Designations
  • Review all assets that name beneficiaries. Common types are:
    • 401(k) plans and IRAs
    • Life Insurance
    • Payable-on-Death/Transfer-on-Death bank or brokerage accounts
  • Are the beneficiaries who you think they should be? If not, update as needed. Contact your attorney or financial advisor if you’re not sure how best to update the beneficiary designation.

If you have questions about your estate plan, need help reviewing your existing documents, or are just getting started, our estate planning team is here to help.