The Myth Of Gift Tax In Washington State
“I want to gift some money to my kids, and avoid estate tax, but I know you can only give $15,000 in a year.” Clients say this regularly. But the gifting cap is a myth! In the vast majority of cases, the term “gift tax” is a misnomer. Only the very wealthiest are at risk of paying actual gift tax during their lifetimes. This is how gifting and gift tax works in Washington:
Washington estate tax (i.e. death tax) applies to the estate of a single person, or the case of a married couple, the 2nd spouse to die. It triggers at just over $2.1M this year and increases very slightly each year. This means every dollar over the triggering point is taxed by the state of Washington before heirs receive distribution. For married people, your attorney can build a death-tax-avoidance trust into your Will, (e.g. a “Disclaimer Trust” or “Credit Shelter Trust”), essentially doubling that triggering point to approximately $4.2M. Thus, if you are married and have a net worth under $4.2M, you can avoid death tax entirely with a trust inside your Will. That might sound like a lot of money, but note that life insurance death benefits and retirement assets count towards calculation of your net worth for purposes of death taxes.
If you are single and have a net worth exceeding $2.1M, or married with a net worth exceeding $4.2M, gifting can be a swift and effective means of staying under the death tax triggering point. Alternatively, regardless of net worth, you may want to gift for personal reasons other than avoidance of death tax. Either way, if you give more than $15,000 in a year (in 2018) to one individual, you will simply need to file a gift tax return with the IRS.
“Gift tax return.” Another misnomer! Actually, a “gift tax return” does not mean you pay any tax (unless you are worth 8 figures or more and are giving away 8 figures or more). It is just a notification to the IRS that you have gifted over the magic number – again, $15,000 this year. The IRS then reduces the gifting person’s lifetime triggering point for federal death tax by every dollar gifted over the $15,000 – the Washington triggering point is not reduced. For the vast majority of people, this over-gifting is irrelevant, because in 2018, the federal death tax does not kick in until $11.1M. Yes, eleven point one million. With death tax avoidance trusts embedded in a married couple’s Wills, the de facto triggering point is $22.2M. So even if you gifted millions, this reduction in federal triggering point would be relevant to very few people.
To sum up, most people can gift freely, and in large amounts which far exceed the mythical “limit.” You should consult with a CPA and estate planning attorney before doing so, but large-scale gifting can be a very effective means of avoiding Washington State estate tax and otherwise carrying out your goal of benefitting family and friends during your lifetime, rather than making your intended beneficiaries wait for your death.