Did you forget to consider this in your estate plan?

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Q:

My wife and I are recently retired after living and working in the Seattle area all our lives. Careful savings, maxing out our annual 401(k) contributions as well as having pensions will enable us to have a comfortable retirement and to leave a nice amount to our daughter, our only child. We’re new clients, so we’re going to be meeting with an estate planning attorney along with our planner to update our estate plan. Before that, we wanted to get a leg up: How worried should we be about Washington state’s estate tax?

A:

First, congratulations. You’ve worked hard to create what seems to be a healthy nest egg that will not only allow you to enjoy retirement but also enable you to leave a substantial amount to your daughter. Because we don’t have specifics on your assets, such as the actual amount in your nest egg, how much you hope to bequeath, the kinds of assets you have and their net values, it’s hard for me to say how you should plan for Washington’s estate tax.

But you’ll be finding out soon because, thankfully, you’ve taken the time to create a comprehensive estate plan. Everyone must have an estate plan, regardless of the amount of assets they have. Period.

All that said, you touched on some general issues people are facing with estate planning, so let’s consider them.
 

Check to see if your state has an estate tax

You’re right. There is a historically high federal estate tax exemption, and for 2024, it’s $13.61 million per individual and $27.22 million for couples. That’s a lifetime tax exemption, so that amount includes all the wealth you transferred during your lifetime as well as the wealth you bequeath to your heirs. While it’s a large amount, don’t assume that your estate won’t owe federal estate taxes. But more on that later.

Let’s first address the state estate tax that may impact your estate.

So many people focus on the federal estate tax exemption and forget to consider whether they live in one of the 12 states (and the District of Columbia) that levy estate taxes.

Good for you for remembering. State estate tax exemptions are generally not as generous as the federal one.

The 12 states are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and yours, Washington. The estate tax regimes in each vary.

Washington state imposes a tax on the estates of deceased residents whose assets exceed $2.193 million and don’t pass to a spouse or a charity. Additionally, unlike the federal estate tax exemption amount, a married couple living in Washington is not able to combine their exemption amounts. The Washington estate tax rate begins at 10% and has a top tax rate of 20%. And Washington is concerned with all of your assets.
 

Your estate includes your life insurance and your cars as much as it does your 401(k)

When you described what you plan to leave your only child, you only mentioned your “savings,” including your 401(k)s and pensions. If you have family heirlooms and jewelry that you want to bequeath your daughter, I’m sure you remembered to add that into the total asset amount as well as property and homes you have. But did you remember to include the value of your cars, if you own them? Hard to know what they will be worth, but they will be worth something.

So many people forget to account for the value of life insurance in their estate, and not just whole life but term life, which may end up being in effect upon your death.

An estate must account for any assets you have when you pass. That inventory isn’t fun, but you want to implement tax strategies now if need be to help prevent your estate being unnecessarily diminished by taxes.
 

The historically high federal estate tax exemption may go ‘bye, bye’ – or not

It’s great that we have a historically high federal estate tax exemption, for now. It will expire at the end of 2025 because it’s part of the Tax Cuts and Jobs Act of 2017, which will sunset at that time.

It’s impossible to predict at this point what new estate tax will emerge under a new tax regime. It may be the same but adjusted for inflation or it may be an even higher tax exemption or a much lower one. Keep in mind that if the lifetime exemption were to sunset today, it would revert to the original 2017 level of $5 million per person, or $10 million per couple, but adjusted for inflation, so that would still be substantial. Moreover, there are a variety of strategies to help mitigate estate taxes, and you and your financial planner can discuss them with an estate planning attorney in the context of your overall financial plan. 

WE HOPE YOU’VE FOUND THIS INFORMATION HELPFUL

Remember that any financial guidance must be adapted to your unique circumstances, so consult your financial planner. In the meantime, keep those questions coming!