Planning for Washington State Estate Tax: Disclaimer Trust Basics
A married couple will often plan for the surviving spouse to inherit their combined assets when one spouse dies. If those assets exceed the Washington estate tax exclusion amount when the second spouse passes, the surviving spouse’s estate is left to pay estate tax. With savvy planning, it is possible for a couple to reduce the amount of Washington estate tax owed by the surviving spouse’s estate. Three effective strategies are using a disclaimer trust, making gifts after the first spouse passes away, and making charitable gifts on the death of the second spouse. Let’s break down these concepts in simple terms.
Understanding Washington State Estate Tax
Washington State imposes an estate tax on estates valued over $2.193 million (as of 2024). This means that if the total value of your estate exceeds this amount, your estate may owe taxes on the excess. When you reduce the size of your Washington taxable estate, you can reduce – or even eliminate – the amount of Washington estate tax owed.
What is a Disclaimer Trust?
A disclaimer trust is a type of trust that allows the surviving spouse to “disclaim” or refuse a portion of the inheritance from the deceased spouse. This disclaimed portion then goes into a trust, which can be used to benefit the surviving spouse during their lifetime and other beneficiaries after the surviving spouse dies.
How a Disclaimer Trust works:
- Creation: The trust is set up under the will of the first spouse to die. If the surviving spouse decides to make a disclaimer and fund the trust, probate will be needed.
- Disclaimer: After the first spouse’s death, the surviving spouse can choose to disclaim a portion of the estate.
- Trust Funding: The disclaimed assets are transferred into the trust.
- Benefits: The surviving spouse can still benefit from the trust assets (e.g., income from investments), but these assets are not included in their estate for tax purposes2.
This strategy helps preserve the estate tax exemption of the first spouse, doubling the amount that can be passed on tax-free to heirs on the second spouse’s death.
Gifting After the First Spouse Dies
Another strategy to reduce estate taxes is to make gifts during your lifetime. Washington State does not have a gift tax. This means that assets you give away during your lifetime are not included in your Washington taxable estate. If you decide to use lifetime giving as an estate planning strategy, always consult with an attorney and your financial advisor or accountant to find out whether a federal gift tax return needs to be filed.
Benefits of gifting:
- Reduce Estate Size: By gifting assets, you reduce the overall value of your estate, potentially bringing it below the taxable threshold.
- Enjoy Seeing the Impact: You get to see your loved ones benefit from your generosity while you’re still alive.
- Federal Gift Tax: You can give up to $18,000 in 2024 per person per year without filing a federal gift tax return.
Charitable Giving on Death
When you leave a gift to a qualified charity on death, it reduces your federal and Washington taxable estate. Charitable gifts on death can be made through a specific bequest in a will or revocable living trust or via a beneficiary designation on a nonprobate asset such as a retirement account.
Combining Strategies
Using both a disclaimer trust and gifting can be a powerful combination. After the first spouse dies, the surviving spouse can disclaim a portion of the estate into a trust, reducing the taxable estate. Additionally, they can make gifts to further decrease the estate’s value. These gifts can include both lifetime gifts to individuals and gifts to charity on death that are included in their estate planning documents.
Example Scenario:
- John and Jane’s Estate: John and Jane have a combined estate worth $4 million.
- John Passes Away: John’s will includes a disclaimer trust.
- Jane Disclaims: Jane disclaims $1 million, which goes into the trust.
- Jane Gifts: Jane then gifts $100,000 each to their three children, reducing the estate by another $300,000.
- Charitable Gifts in Jane’s Will: Jane leaves $600,000 in her Will to her favorite charitable organization. This reduces her Washington taxable estate.
- Result: Jane’s remaining estate is now $2.1 million, potentially eliminating any Washington estate tax owed by her estate.
Final Thoughts
By understanding and utilizing tools like disclaimer trusts and gifting, you can make informed decisions that benefit your family. Always consult with an estate planning attorney to tailor these strategies to your specific situation. Feel free to reach out if you have any questions or need further assistance with your estate planning journey.
To learn more about Planning for Washington State Estate Tax: Disclaimer Trust Basics, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.
