Washington State and Federal Tax Exemptions

Washington State Estate Tax Exemption

Washington State and Federal Tax Exemptions – The Washington State estate tax exemption (“WA Exemption”) has not changed in the last couple of years and remains at $2,193,000 per person in 2021. The WA Exemption is supposed to be indexed for inflation; however, the index that was used prior to 2018 no longer exists. If the law is ever changed to reference the new index, then the WA Exemption amount should increase. Washington estates in excess of the WA Exemption amount are subject to a 10% – 20% Washington State Estate Tax.

Federal Tax Exemptions – Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax

The 2021 federal estate and gift exemption (“Federal Exemption”) is $11,700,000 per person. The exemption was increased by $120,000 over the 2020 exemption of $11,580,000 (the increase reflects an inflation adjustment). Gifts and estates in excess of the Federal Exemptions amount are subject to a 40% federal estate tax. The federal generation-skipping transfer tax exemption (“GST Exemption”) was also increased to $11,700,000 per person.

The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) created a dramatic (but temporary) increase to the Federal Exemptions and the GST Exemption from $5,000,000 (indexed for inflation) to $10,000,000 (indexed for inflation). Without intervention in the meantime, the temporarily increased Exemptions will revert back to $5,000,000 (indexed for inflation) on January 1, 2026. However, with Democrats now in control of the White House and Congress, changes to the Exemptions may occur prior to the end of 2025. While Joe Biden has not released a detailed tax policy either as a candidate or as President-elect, the following estate planning tax changes were discussed/proposed during the 2020 election: (1) reducing the federal estate tax exemption from $11,700,000 to either (a) the pre-2017 Tax Act amount of $5,000,000 (indexed for inflation) or (b) $3,500,000; (2) reducing the federal gift tax exemption to $1,000,000; (3) reducing the maximum amount an individual donor can give to recipients using the annual gift tax exclusion; (4) increasing the top estate tax rate for estates exceeding the federal estate exemption from 40% to 45%, and (5) making death a realization event for appreciated assets (i.e., the beneficiary inherits your basis rather than getting a stepped-up basis). Even with uncertainties of Joe Biden’s tax reform plans and narrow Democratic control of the Senate, tax law changes are anticipated given current budget deficits; the ongoing pandemic; and Biden’s campaign proposals on issues like healthcare, climate change, and infrastructure.

Federal Annual Gift Tax Exclusion

In 2021, every individual can transfer cash or other assets worth up to $15,000 to an unlimited number of recipients. This is known as the annual gift tax exclusion.

State and Federal Estate and Gift Tax Summary

The chart below outlines the federal and state exemptions and tax rates for 2017 through 2021:

Tax Quote: “The hardest thing in the world to understand is the income tax.” Albert Einstein

Keeping Your Estate Plan Current

Even though most estate planners create estate plans with some flexibility, it is not possible to anticipate all of the potential changes that may occur after documents are signed. In addition to changes in tax laws, the following events may prompt you to update some or all of your estate planning documents:

• marriage, divorce, birth (or adoption), and/or death;
• a health problem or serious illness/disability;
• significant increase or decrease in the value of your estate;
• significant increase or decrease in income or change in nature of income;
• change in the manner of asset ownership or business interests;
• change in employment or retirement;
• change of state of residence;
• receipt of inheritance or gift;
• a child turns 18;
• charitable giving goals change;
• behavioral changes where a beneficiary/fiduciary develops an overspending/gambling habit, or becomes addicted to drugs/alcohol;
• life insurance purchase or change in insurability (ideally, contact an estate planner prior to purchasing a new life insurance policy); and
• purchase of real property located outside Washington (ideally, contact an estate planner prior to purchasing a real property in another state).

The preceding list applies not only to changes in your own life, but also to people included in your estate plan as either a beneficiary or a fiduciary (e.g., Personal Representative, Trustee, Attorney-in-Fact, or Guardian). While this list is not intended to be comprehensive, it is intended to prompt an occasional review of your estate plan. Generally, we recommend reviewing your estate plan every two to three years to make sure the plan still reflects your wishes. If any of the changes outlined above occur after you have executed your estate planning documents, please contact our office so that together we may review your existing plan and advise you concerning any necessary or suggested changes.

Tax Fun Fact: Peter the Great imposed a tax on men with beards. Those who paid the tax were required to carry a beard token. 

Digital Assets – Online Tools Coordinated with or Purposefully Deviated from Estate Planning Documents

Most fiduciaries (e.g., Personal Representative, Trustee, or Attorney-in-Fact) were previously told to monitor an incapacitated or deceased person’s mail to gather information on assets and liabilities. More recently, that advice has changed to include accessing the incapacitated or deceased person’s emails since most people have made the switch to paperless statements. When it comes to accessing digital assets, priority of access is generally granted in the following order: (1) pursuant to the user’s instructions on file with the custodian (e.g., Google, Facebook); (2) pursuant to the user’s written instructions in a Will, Trust, or Power of Attorney; or (3) pursuant to the custodian’s terms of service.

While estate planning documents drafted in recent years generally include a provision allowing the fiduciary to access digital assets, since the user’s instructions on file with the custodian are given the top priority when attempting to access a user’s digital assets, it is important to be aware of the custodian’s policies so that you can either coordinate your instructions with your estate planning documents, or purposefully diverge from them. The person you select as your Personal Representative (or Trustee if you have Revocable Living Trust) should be financially responsible and organized. However, that person may not be the right choice to manage your social media accounts following your death. In that case, you may want to use a custodian’s online tools to grant access to someone other than your Personal Representative/Trustee. One custodian, Facebook, allows a user to designate a legacy contact. The person designated as your legacy contact will receive an email letting them know they have been designated (you can choose not to send the message, but then they may not ever know that you have selected them as your legacy contact). Following your death, the legacy contact can memorialize your page, update your profile picture, and pin a post on your timeline (this feature is frequently used to announce details for memorial/funeral services).

If you would prefer to rely on the provisions in your estate planning documents to grant access to your digital access to your fiduciary, you should consider making a list of the location of all of your digital assets such as the following:

• bank accounts
• brokerage accounts
• mortgage company
• credit cards
• photo storage/sharing
• social media
• gaming platforms
• music/video services

While you should obviously be cautious with usernames, passwords, and account numbers, at least making a list of where you have accounts will be very helpful when your fiduciary is attempting to track everything down.