Washington Transfer Tax - A Different Set of Rules

Feb 03, 2014

By Jenna Ichikawa | Related Practice: Estate Planning & Administration

When considering making a gift during your lifetime or as part of your estate planning, it is important to remember that Washington State’s transfer tax laws differ from the federal laws made permanent under the American Taxpayer Relief Act of 2012 (ATRA).

The greatest distinction between the federal transfer system and Washington’s is the gift tax.  While there is a federal gift tax on gifts made by a person during life, Washington has no gift tax.  Under federal law, a donor may use the “annual exclusion” to give up to $14,000 a year tax-free to discrete individuals. That same donor though, will incur a 40% federal gift tax on other gifts in excess of $5,340,000 over the donor’s lifetime.  Because there is no separate Washington gift tax, all gifts made by a Washington resident will be free of any state gift tax.

There are also notable distinctions between the federal estate tax and the Washington estate tax. First, under ATRA, federal law coordinates the estate tax exemption with the lifetime gift exemption so any portion of the $5,340,000 exemption used during an individual’s life will reduce the amount of federal estate tax exemption available at death.  Washington State does not have similar rules regarding use of exemption on lifetime gifts.  Second, the Washington estate tax affects individuals with estates of $2,012,000 rather than the higher threshold of $5,340,000 for the federal estate tax.  If a Washington resident makes lifetime gifts and reduces the size of the estate below $2,012,000, there will be no Washington estate tax payable at death.  Finally, the federal “portability” provision that allows a deceased spouse’s unused exemption to be used by the surviving spouse does not apply for Washington estate tax purposes.  Spouses in Washington may only use their individual $2,012,000 estate tax exemption and any unused portion may not be transferred to a surviving spouse.  Since the taxable estate includes assets such as life insurance and retirement accounts, a large number of people may be subject to the Washington estate tax even though they will not have any federal estate tax.

In short, it is important to consider Washington transfer tax laws as part of the estate planning process.