But let me explain how this simple technique works. And then illustrate why it’s so powerful using our tax-inclusive gift tax calculator (which appears below).

A $10,000,000 Gift Shows Mechanics

To set this up, assume your estate will be subject to the 40% federal estate or gift tax as well as the top state estate tax (currently 35%.)

Note: For the record, few families need to worry about federal estate taxes. But Washington state estate taxes kick in when an estate exceeds roughly $3,000,000. (More information: here.)

If you gift $10,000,000 in this situation, you pay a 40% gift tax or $4,000,000. That sounds terrible. But in effect, in a best-case scenario, you may be moving $14,000,000 out of your estate. Thus, one way to look at this is you’re paying $4,000,000 to move $14,000,000 out of your estate. And that amounts to a 29%-ish federal “estate and gift tax.” (Okay, maybe that still sounds like a lot. But 29% is less than 40%.)

Further, in the best case scenario, that $14,000,000 transfer zeros out Washington state estate taxes on $14,000,000 of your estate. That would save $4,900,000 in state estate taxes.

The Gift Tax Addback

But there’s a wrinkle here. If you die within three years of gifting, the gift tax you paid? It gets added back to the estate on which you pay federal and state estate taxes. In other words, that $4,000,000 in the earlier example? Your estate pays federal and state estate taxes on that money if you die within three years of the gift.

You still save taxes in this scenario. But the math gets tricky. Thus, the calculator below.

Using Tax-Inclusive Gift Strategy Calculator

The initial inputs show a $10,000,000 gift and set the federal estate or gift tax percent to 40% and the state estate tax to 35%. You can enter some other gift amount. Or change the estate and gift tax percentages. The calculator recalculates as you make changes.

Note: On July 1, 2025, the Washington state estate tax jumped from 20% to 35%. As I’m writing this, however, the state legislature is in process of enacting a bill that may return the top estate tax rate to 20% as of April 1, 2026.

Understanding the Tax-Inclusive Gift Strategy

A quick overview of the two potential savings that flow from a tax-inclusive gift:

First, if you gift, pay the gift tax, but then your estate avoids the gift tax addback? That means you only paid federal taxes on only a portion of the money you’re effectively moving out of your estate. (With the default inputs, this is the best case “all you pay is $4,000,000 of gift tax” scenario.)

Second, if you gift but your estate later does the addback? Then you lose some of the savings. Roughly half in fact with the default inputs. What’s happening here is, your estate pays state and federal estate taxes on the gift tax you paid to the IRS.

Third, if you do nothing? That’s the worst-case scenario modeled here. That worst case “pay state and then federal estate taxes” scenario means you first pay the Washington state estate tax on your $14,000,000 (or whatever). And then, after that, you pay the federal estate tax on the leftover.

In the area under the input boxes, the calculator shows the range of estimated tax savings a tax-inclusive gift generates for a specified gift amount.

Some Caveats

You need to think carefully about the tax-inclusive gifts. And probably you want the help of your tax and legal advisors. But some things to ponder:

You obviously are moving assets out of your estate. So that impacts your income and lifestyle potentially.

Related to this point, for good or bad, you also move income out of your estate and into your heirs. If you did move $10,000,000 from your investment account to your daughters and you paid a $4,000,000 gift tax, every year you would have held that money is a year you don’t earn income on the $14,000,000. But, of course, every year your daughters do earn income on $10,000,000. That’s something to consider.

If you gift appreciated assets you lose the Section 1014 adjustment (aka “step-up basis” adjustment). Probably, then, you would not want to gift appreciated assets.

Finally, whether this tactic makes sense and optimizes depends on your alternatives. Your estate planning attorneys have lots of other options which will potentially work well in scenarios where you’re not paying gift taxes.

Some Other Resources

Another high impact option for avoiding Washington state estate taxes (or income taxes) is changing domicile. We talked about that in a recent blog posts here: Washington State Millionaires Tax Residency Rules and here: Changing Your Washington State Residency.

If you’re interested in reading the actual law that creates the gift tax addback, that appears here: Section 2035.

The post The Tax-Inclusive Gift Strategy Calculator appeared first on Evergreen Small Business.

But if you can’t move to another state—and most people can’t—another option possibly exits: You can move some assets to another state.

To begin this discussion, let me start with a quick example of how the state’s estate tax formula works. (I’m going to use the estate tax formula for 2025 because that makes for rounder numbers.) And then I’ll get into the exporting assets thing.

Quick Review of How Washington State’s Estate Tax Formula Works

In 2025, a decedent dying in the last half of the year pays zero estate taxes on the first $3,000,000 of their net worth. (The amount inflates in subsequent years. For 2026, for example, that nice round $3,000,000 ratchets up to $3,076,000.)

On the next $9,000,000, they pay an estate tax rate that starts at 10% but quickly escalates to 35%. In total, though, on that $9,000,000 “band”, they pay $1,930,000 of estate tax.

On the rest of their net worth, they pay a flat 35% estate tax.

Thus, for example, the estate (or really the heirs) of someone who dies with $22,000,000 in late 2025 pays $5,430,000 in estate taxes.

How Out of State Assets Affect the Taxes

But here’s something else to note: Washington state doesn’t “estate tax” residents on out of state tangible property.

For example, while a Washington state resident who died in late 2025 with a $22,000,000 of net worth pays $5,430,000 if the assets are all located in Washington state? If a taxpayer stored or situated half of their assets, or $11,000,000 of their $22,000,000, out of state? That allocation halves the estate tax bill.

Thus this idea to export assets…

How Would Someone Export Assets?

To make this illustration easy, I want to use some big round numbers. So, let’s say two Washington state residents, Tom and Pete, each have $22,000,000. Both own a $10,000,000 retirement account, a $10,000,000 rental income property, a $1,000,000 rare coins collection, and a $1,000,000 condominium where they reside.

I also need to tell you something else here. Washington state sources intangible assets to the state of domicile. Thus, that giant retirement account holding $10,000,000? That’s an intangible asset. No matter what, for both Tom and Pete, Washington state treats it as located in Washington state. (This bit becomes important in a minute.)

But the tangible stuff? So, the $10,000,000 rental property and the $1,000,000 rare coins collection and the $1,000,000 condo? State law sources those to the state where the property is.

If Tom’s rental property, coin collection and condo are all in Washinton state? All $22,000,000 of his stuff sits in Washington state. And he pays the estate tax on the full $22,000,000. So, $5,430,000.

If Pete’s condo is in Washington state but the rental property and coin collection are in Nevada? Yeah, in that case, $11,000,000 of his $22,000,000 estate is tangible property outside of Washington. And therefore, his estate only pays Washington state estate taxes on half of his estate, so $2,715,000.

The obvious maneuver then: If Tom moves his coin collection to another state and exchanges his Washington rental property for one in some other state, voila.  He halves the estate taxes his heirs effectively pay.

Three Wrinkles Related to Exporting Assets

You want to know three other things as you think about this strategy of exporting assets. The first one? You want to export assets to a state with no estate tax. (That should be pretty easy. Most states don’t levy estate taxes. And none levies an estate tax as high as Washington’s 35% rate.)

The second thing to know: If you invest in tangible property through a limited liability company, Washington state sees that as intangible property. Not tangible property. Intangible property, as noted earlier, gets sourced to the state of domicile. Thus, you need to directly own the property. Tom then, in the example above, needs to exchange his $10,000,000 rental property in Washington state for a $10,000,000 rental property in Nevada. Not for a Nevada LLC that owns a $10,000,000 rental property in Nevada. (The Washington Department of Revenue explains and confirms this treatment here.)

A third thing to know and this is common sensed: A person needs to move tangible assets out of the state before they die. This “exporting assets” tactic isn’t something an executor or personal representative does while administering the estate.

Other Resource

Our Washington State Estate Tax Calculator

How Washington State “Estate Taxes” Income in Respect of a Decedent

Powerball Estate Tax Planning

The post Exporting Assets Avoids Washington State’s 35% Estate Tax appeared first on Evergreen Small Business.

For purposes of this blog post, I’m going to talk in terms of the recent, late December 2025 $1,500,000,000 Powerball. That drawing gave the winner an option. Receive $50,000,000 annually for three decades. Or, alternatively, take a roughly $700,000,000 lump sum.

And that choice—annuity vs lump sum—is the part I want to focus on…

The TLDR Summary: Take the Lump Sum

To cut to the chase, with large Powerball lottery winnings, the safe tax plan is probably to take the lump sum. This advice appears to be the opposite of what I saw reported in the media. Most experts appeared to think $50 million a year for thirty years makes more sense. And just superficially? That advice sounds right.

But seriously you really don’t want to burden heirs with the catastrophic estate tax risks of an annuity. And a quick illustration explains why.

Say you were confronted with the exhilarating choice of either $50 million a year for three decades versus a lump sum $700 million. And then (sorry) say you died the day after you won.

In this situation, your estate owes about $427,000,000 in estate taxes if you domicile in Washington state. (The state’s new 35% estate tax will amount to about $245 million. The federal 40% estate tax would account for the other $182 million.)

And the problem here? Your estate and heirs only “have” enough cash to pay the $427 million of estate taxes due a few months after your death if you took the $700 million lump sum.

Paying the Estate Taxes Off Over Time

In other words, in the tragically absurd scenario where you took the annuity and then died, your heirs will find themselves paying off the $427,000,000 estate tax liablity using the $50,000,000 annual annuity.

That sounds workable. But let me step you though the details so you see it’s a terrible outcome.

First of all, the federal and state income taxes on the $50 million might run about $18 million for a Washingtonian if the state’s new 10% millionaire’s tax has become law. So you don’t have $50 million each to grind down the debt. You have about $32 million after income taxes.

But because you owe the state and the federal government several hundred million dollars in taxes? Your estate accrues, one way or another, interest on the hundreds of millions of dollars of tax debt. Close to $24 million the first year, roughly $23 million in years two and three, and then ever smaller amounts as the “loan balance” shrinks.

Now, yes, your heirs will slowly be able to pay off the estate tax lability loan using the leftover money: $8 million of principal the first year, $9 million the second year, and increasingly large amounts each future year. But the paydown process will take decades. (I did a little Excel spreadsheet that amortizes the pay down and it takes the first 24 annual payments to extinguish the debt if the interest rate is 6%.)

And that’s the surprise here. Taxes not only reduce the net winnings (by more than 80%.) Taxes also delay when heirs receive their inheritances. And worse than that , some heir will find him or herself jungling estate finances over decades to pay off the $400,000,000-ish estate tax bill.

Thus my advice: If you ever do win a big state lottery? Yeah, absolutely take the lump sum.

Closing Comments and Caveats

Let me share three other comments, too, before I close.

First, comment: I was a little rough in my accounting. The federal tax rate for example isn’t exactly 40%. Rather, it’s 37% for the federal income tax and then 3.8% for the net investment income tax so a total of 40.8%. The federal estate tax is a flat 40% but only after any state estate tax is paid and only above $15 million (roughly). The new 35% Washington state tax applies only above $3 million and uses a $9 million phase in range where the rate starts at 10% and then rises to 35%. Finally, I assume that both federal income taxes and state income taxes calculations allow a deduction for the estate taxes paid. Federal rates do work that way. But we don’t know how a new Washington state millionaires tax might work.

Second comment: The fundamental, structural problem here is the estate needs to pay taxes on illiquid assets not easily converted to cash. And note this isn’t only a problem with something like a lottery annuity. Illiquid business and investment interests may create a similar timing problem for families.

Third comment: A change in domicile can fix or address a state estate tax problem as well as reduce a state income tax burden. Moving from Washington state to Nevada, for example, potentially zeros out your Washington state estate and income taxes. (If you really did win a Powerball lottery and you currently reside in Washington state? You’d probably want to seriously look at a domicile change.) You can’t however do something similar with federal estate and income taxes. Thus, moving from Washington state to, say, Luxemburg does not zero out your federal estate and income taxes.

Additional Resources

Washington State Estate Tax Calculator

Planning for the 35% Washington Estate Tax

Changing Your Washington State Residency (or Domicile)

The post Powerball Lottery Tax Planning appeared first on Evergreen Small Business.

But if you’re curious about establishing residency in or changing your domicile to some new state? Maybe you want to avoid the Washington state capital gains tax? Or maybe you want your heirs to avoid the new higher Washington state estate taxes? (Click here to learn about the new higher tax.) Washington provides a useful form for thinking about these issues: Form 85-0045, the Affidavit Substantiating Decedent’s State of Domicile at Death.

The General Washington Residency Rule to Start

Let’s start with the general residency rule, though, which comes from the Revised Code of Washington (RCW 83.100.020), the Washington Administrative Code (WAC 458-57-105), and ironically from the Department of Revenues FAQ (click here).

Residents potentially owe estate and capital gains tax returns. And residents are people domiciled in Washington state.

So what is a person’s domicile? Quoting ChatGPT, “’Domicile’ means a person’s true, fixed, and permanent home and place of habitation. It is the place the person intends to return to whenever absent. A person can have only one domicile at a time”.

The state applies a facts and circumstances test and basically looks at all the common-sense stuff you would look at if your job was determining people’s domiciles. But you and I get a concrete sense of what matters from that Form 85-0045.

The actual form appears here: Affidavit Substantiating Decedent’s State of Domicile at Death. And for background, a personal representative, or executor, might fill out and provide this form to the state’s Department of Revenue if he or she needs help determining domicile.

But the other useful thing? The form helps you think concretely the mechanics of possibly changing your domicile.

Reviewing Form 85-0045

A first tip to start: Go ahead and grab the form and fill it out the way you’d want to be able to fill it out if you were arguing you’re not a Washington resident. Because you do not want to be subject to the state’s capital gains tax, say. Or because you do not want your estate or the estate of some family member to be subject to the state’s estate tax. Answering the form’s questions will help you understand the issues. (The form resembles a test where the questions signal the correct answers.)

But let me point to the key bits if you’re thinking about your own Washington state residency.

Primary Residence at Time of Death

The very first question of the affidavit asks for the decedent’s current primary residence, the mailing address, the time living at this location, and then whether there was any known intent to continue or change this residency. So that’s the big thing. And the significance: If you’re going to argue your residence or domicile isn’t in Washington state, you want or need to be able to point to a residence in some other different state. Makes sense, right?

A couple of other questions at the top of the form explore this issue in more detail. The second question, for example, asks if the decedent was residing in a nursing home at the date of death and how long he or she had been in the nursing home. The third question asks if the decedent owned a home and whether that home was or is rented or leased or available for rental or lease. (Obviously, you can’t argue you plan to return to your house in Las Vegas if you’re renting or leasing it to someone else.)

Washington State Real and Personal Property

Next point: A number of the Affidavit’s questions (specifically, questions 3, 4, 6, 8 and 13) ask about whether the decedent owned property in Washington state. Real property (like a home), personal property including cars, business interests and so on. The affidavit also asks about safe deposit boxes in Washington state. Those of course might store some of the most valuable personal property a person owns like jewelry and gold. (The form doesn’t ask if you’ve rented storage units or lockers in Washington state. But those should probably be considered in the same manner as safe deposit boxes.)

Pretty obviously if you want to strongly claim another state for your residency or domicile, property located in Washington state matters. A lot.

Also this comment and reminder: If you have any real property located in or personal property stored in Washington state, your estate needs to file a Washington state estate tax return if the estate crosses the filing threshold.

Example: A decedent domiciled in Nevada dies during the last half of 2025 when the filing threshold equals $3,000,000. The total estate includes only two items: A $3,000,000 IRA and then also a small undeveloped parcel located in Kitsap County worth $100,000. The Nevadan’s estate needs to file a Washington state estate tax return because the gross estate value exceeds $3,000,000. Note that the estate will pay only a tiny amount of tax. (About $300 in this situation.)

Washington State Activity Within Prior Five Years

The affidavit also asks questions about any in-state business or personal activities within the last five years. The fifth question for example asks whether the decedent was employed in Washington state any time in the prior five years. The sixth question asks if the decedent owned or operated a business in Washington state during the prior five years. The twelfth question asks about memberships in Washington state community or religious organizations, clubs or societies in the last five years. The fourteenth question asks for a complete list of trips (including location visited, travel dates, and reasons for travel) during the prior five years.

You can see what the Department of Revenue is trying to glean here: How connected are you to Washington state? Close, tight connections weaken an argument that you’re domiciled in some other state. And the lookback period? The prior five years.

Official Government Documentation Connected to Location

A final observation about the affidavit—which works as a good reminder too. The affidavit asks a number of questions that can be easily verified by looking at a government document. For example, the seventh question asks which IRS service center the decedent used to file tax returns. And for the address shown on the federal tax return.

The ninth question asks where the decedent was or is registered to vote.

The tenth question asks if the decedent held a driver’s license and if so from which state.

The eleventh question asks whether the decedent held any licenses or permits at the time of death. These might be recreational permits (fishing or hunting licenses) or professional licenses (like a CPA license or state bar membership).

Finally, the fifteenth question asks if the decedent declared a state of residence near the time of death. If so, it asks to whom the declaration was made and when.

The obvious observations here: All the federal and state government documents you file should match the story of your residency. The tax returns you file, for example, should logically match the residency or domicile you’re claiming. And if you’re domiciled in, say, Texas, the majority or maybe even all your licenses and permits should match that state.

Wrapping Up Comments

Form 85-0045 seems insightful to me if you’re starting to think about residency and domicile and maybe moving to some new state. You get a good picture of the changes to make if you did decide to move.

And just to summarize all this, you ideally want to avoid having any property in Washington state—at least if you’re worried about filing an estate tax return. That property—even if only miniscule—triggers a requirement to file an estate tax return if you’re over the reporting threshold. Reporting obviously puts you on the Department of Revenue radar screen whether you deserve to be or not.

You need a home someplace else. And with that, a mailing address along with things like a drivers’ license, voter registration, and then state and local licenses and permits as appropriate for a resident. Ideally, your profile would resemble a local Floridian, Texan or Nevadan if you decide to reside in Florida, Texas or Nevada.

Do make strong connections to your new location. And then limit or intentionally weaken connections your former state of residence.

Finally, think about how much time you spend you spend in Washington state. Less is better. You may even want to document how little time and how inconsequential the in-state activities.

The post Changing Your Washington State Residency appeared first on Evergreen Small Business.

But when taxpayer estates do the pay the tax? Ouch. Rates start at 20%. And rise ultimately to 35%.

Further, as bad as that may sound if your estate or the estate of someone in your family pays this tax? The situation may be far worse because of the way “income in respect of a decedent” is taxed.

The problem in a nutshell: State estate taxes may fully tax the “pre-tax” income in respect of a decedent.

What is Income in Respect of a Decedent?!

Good and important question. And one we can best answer with a simple example. The most common form of income in respect of a decedent are the wages someone earned but hadn’t yet been paid when they died. That income hasn’t yet been subjected to income taxes. Thus, federal tax laws tax it.

Example: Someone dies with $10,000 of accrued wages. Those wages paid after death represent income in respect of a decedent. The estate or heirs pay the income taxes the decedent would have paid on the $10,000.  Maybe $3,000 to $4,000 in most cases. Thus the estate or heirs may only receive $6,000 or $7,000. But Washington state may tax the full $10,000.

Now a single payroll? Probably not that big a deal. A family that’s just lost a breadwinner has far bigger issues and concerns. And most estates don’t pay the Washington state estate tax.

But if an estate does pay Washington state estate taxes, the IRD issue grows in significance. And here’s why.

IRD includes a bunch of stuff. It includes most retirement account balances like traditional deductible IRA, 401(k), 403(b) and 457(b) and cash balance retirement plans. IRD includes some of the common equity compensation income provided to technology company employees including nonqualified stock options, restricted stock units, restricted stock awards and then other deferred compensation or stock deferral plans. IRD can also include large windfall amounts—lottery winnings, composer and author royalties, and SEC and IRS whistleblower awards—which won’t be collected until years or decades after the estate taxes are due. (More on this in few paragraphs.)

How Washington State Handles IRD

The problem here? The Washington estate tax is imposed on the full value of income in respect of a decedent (IRD) without regard to the income taxes that will later be owed.

Example: A Washington decedent’s estate includes $10,000,000 of IRD and is subject to the top 35% Washington estate tax rate. The resulting state estate tax equals $3,500,000.

When the IRD is later received, the estate or beneficiaries receive an income-tax deduction under IRC §691(c) equal to the estate tax attributable to the IRD. As a result, only $6,500,000 of the IRD is subject to federal income tax. At a combined 37% federal rate plus 3.8% net investment income tax, that produces an additional $2,652,000 of federal income tax.

In total, the combined Washington estate tax and federal income tax equal $6,152,000 — an effective tax rate of roughly 62%

How Federal Estate Taxes Handle IRD and State Estate Taxes

The tax situation becomes even worse when federal estate tax applies because the decedent’s estate exceeds the basic exclusion amount. In that case, income in respect of a decedent (IRD) can be subjected to Washington estate tax, federal estate tax, and federal income tax.

Example: A Washington decedent’s estate includes $10,000,000 of IRD. Washington estate tax at 35% produces a $3,500,000 tax. Because Washington estate tax is deductible for federal estate tax purposes, the federal taxable estate attributable to the IRD equals $6,500,000, resulting in $2,600,000 of federal estate tax at a 40% rate.

The total estate tax attributable to the IRD is therefore $6,100,000. Under IRC §691(c), that amount becomes an income-tax deduction when the IRD is later received. As a result, only $3,900,000 of the IRD is subject to federal income tax. At a combined 37% federal rate plus 3.8% net investment income tax, this produces an additional $1,591,200 of income tax.

In total, combined Washington estate tax, federal estate tax, and federal income tax equal $7,691,200 — an effective tax rate of nearly 77% on the $10,000,000 of IRD.

And believe it or not, the situation can in a handful of situations get even worse. There is a nightmare scenario.

The Liquidity Nightmare: Estate Taxes Due Before IRD Pid

Here’s the true nightmare scenario: a decedent’s estate includes substantial income in respect of a decedent (IRD), but the estate will not actually receive the income for many years.

This can occur, for example, when IRD consists of a long-term payout stream such as a lottery annuity, structured settlement, or deferred compensation arrangement. In these cases, the estate tax is due shortly after death—even though the cash needed to pay that tax may not arrive for decades.

Example: Suppose a Washington decedent dies owning the right to receive $1,000,000 per year from a lottery annuity, with 15 annual payments remaining. For estate-tax purposes, the annuity is valued at $10,000,000. Washington estate tax at the top 35% rate produces a $3,500,000 estate tax liability attributable to the IRD.

The problem is timing. The Washington estate tax is generally due within nine months of death, but the estate does not receive its next $1,000,000 lottery payment until a year later. As a result, the estate must either borrow to pay the tax or request extensions while interest accrues.

When the first $1,000,000 annuity payment is eventually received, a substantial portion is immediately consumed by federal income taxes. Even after accounting for the §691(c) deduction, roughly $250,000 to $300,000 of the payment may go to federal income tax and net investment income tax. The remaining cash is then applied toward interest and principal on the estate tax obligation, leaving only a fraction of each annual payment to reduce the underlying estate tax balance.

Because the annuity payments are relatively small compared to the upfront estate tax liability, it can take many years for the estate to fully retire the tax debt. During that period, interest continues to accrue, and heirs may receive little or no net benefit from the IRD for a long time.

In extreme cases, the estate may be forced to borrow repeatedly or even liquidate non-IRD assets simply to service the estate tax obligation created by the IRD itself.

Some Quick Final Comments

What do you do about this? You’ve already taken the first step (maybe) which is recognizing the potential size of the problem if your estate includes substantial IRD.

As far as remedies or palliative measures? Your first step is probably to confer with a good estate planner. All the usual federal estate planning techniques and methods probably get turbocharged if you’re talking about IRD potentially subject to Washington state’s estate tax. (Here’s a primer of basic techniques: Washington state estate tax planning techniques. But if you’re potentially taxed on a lot of IRD? You’re going to want to look at the more sophisticated techniques available too.)

Thus, three closing remarks and ideas to discuss with your attorney or accountant.

First, an interesting feature of Washington’s estate tax regime is, the state doesn’t tax gifts. Thus, while a large gift to heirs might trigger federal gift taxes or use up the federal basic exclusion amount, those gifts typically don’t result in additional Washington state estate taxes.

Note: Starting in 2026, you can gift up to $15,000,000 without triggering gift taxes. Married? The amount doubles: You and your spouse can together gift up to $30,000,000.

Second, I’m usually not a big Roth account fan. (See here for a list of all blog posts that discuss the reasons here.) But paying the taxes now to convert a big $10,000,000 tax-deferred IRA (and IRD) to a smaller but equivalent after-tax $5,900,200 Roth account (which is not IRD)? That often makes good sense if it saves Washington state estate taxes. If a $10,000,000 traditional IRA gets converted and you’re avoiding the top estate tax rate, for example, the tax savings roughly equal $1.6 million.

And then, third, the other obvious option to at least consider: Someone with a lot of IRD in their estate may want to consider changing their domicile.

Additional Resources

Need more background information on the state’s new estate tax? Check out this blog post: Planning for the New 35% Washington State Estate Tax.

Want to estimate what state taxes an estate might pay? This calculator makes a good estimate for estates created after July 1, 2025: Washington State Estate Tax Calculator.

The post The Washington Estate Tax Income in Respect of Decedent Problem appeared first on Evergreen Small Business.

Thus, if you or someone in your family may pay Washington state estate taxes? Especially that top 35% rate? You want to understand how the estate tax works. And what steps you may be able to take to minimize the burden.

To help with this thinking, this long-ish blog post. It explains how the new higher-tax-rates Washington state estate tax formula works. And it points out the handful of tax planning gambits affected taxpayers will want to consider.

Basic Washington State Estate Tax Formula

Let’s start by reviewing the basic formula. Washington taxes estates using the following formula for decedents dying July 1, 2025 or later:

Estates up to $3,000,000 pay zero estate tax due to an exclusion amount. (State law adjusts this exclusion amount for inflation after 2025. But for purposes of this discussion, we’re mostly going to ignore the adjustment. That ignorance makes the math easier.)

Estates between $3,000,000 and $12,000,000 pay a graduated tax that starts at 10% but then steadily marches up to the top 35% tax rate. A $12,000,000 estate created between July 1 and December 31 of 2025, for example, pays $1,930,000 in estate taxes. But the table below summarizes the actual tax brackets.

Estates greater than $12,000,000 pay $1,930,000 in estate taxes plus 35% of the amount by which the estate exceeds $12,000,000.

Example 1: A Washington resident dies with a total estate of $22,000,000 in late 2025. His estate pays no estate taxes on the first $3,000,000 of value due to the exclusion amount. The estate pays $1,930,000 on the next $9,000,000 of value. And the estate pays $3,500,000 on the last $10,000,000 of value. In total, then, the estate pays $5,430,000 in estate taxes.

Washington State Estate Tax Formula “Standard Deductions”

In most cases, deductions reduce the size of the taxable estate.

Perhaps most important, most spousal transfers don’t get taxed.

Example 2: A married taxpayer dies with an estate equal to $22,000,000. The taxpayer’s will transfers $19,000,000 of that to his spouse. That spousal transfer probably reduces the estate value to $3,000,000. The $3,000,000 exclusion amount shelters that $3,000,000. Thus, the estate pays zero estate taxes.

Note: Credit shelter trusts, as your attorney can explain, often let married taxpayers in effect use the exclusion amount twice: $3,000,000 when the first spouse dies and another $3,000,000 when the second spouse dies. (In a guest blog post here, “Washington Estate Tax Tips Save Thousands” Redmond, WA attorney Raemi Gilkerson explains how these credit shelter trusts work.)

Charitable contributions also reduce the size of the taxable estate.

Estate administration costs (attorneys, accountants, appraisers and so forth) also get deducted from the gross estate to determine the taxable estate.

Qualified Family-owned Business Interest Deduction

In a tiny handful of situations, an estate may deduct the value of a qualified family-owned business interest in a small business to shelter up to roughly $3,000,000 of the estate. (Getting this deduction to work is tricky as described here, “Qualified Family-owned Business Interest Deduction: Updated for 2025.” But families and professionals want to at least investigate the deduction if they think it applies.)

Example 3: A taxpayer leaves a $12,000,000 estate. The estate spends $100,000 on administration costs and makes a $2,900,000 charitable contribution to a Seattle hospital. That leaves $9,000,000 in the estate. A qualified family-owned business interest worth $6,000,000 would, according to a very complicated formula, potentially create a qualified family-owned business interest deduction equal to $3,000,000. The regular exclusion amount shelters $3,000,000. That leaves a taxable estate of $3,000,000 on which the estate pays $420,000.

Out of State Adjustments

If a taxpayer owns out-of-state real estate or tangible personal property, that property reduces the Washington state estate taxes on a pro rata basis. If half a Washington resident’s estate consists of out-of-state tangible property, for example, the Washington state estate tax formula halves the estate taxes owed.

Example 4: A taxpayer dies with a $22,000,000 estate in late 2025. As example 1 shows, if the taxpayer’s property all sits in Washington state, the estate pays a $5,430,000 estate tax. But if the estate includes a $6,000,000 home in Palm Springs (so out-of-state real estate) and $5,000,000 of gold stored in a Los Angeles bank vault (so out-of-state tangible property), $11,000,000, or 50 percent of the taxpayer’s $22,000,000 estate is “out of state.” In this case, then, the estate reduces the $5,430,000 estate tax by 50 percent, so from $5,430,000 to $2,715,000.

Some Washington Estate Tax Planning Concepts

Start kicking around the concepts described in the preceding paragraphs and you can (surely with your attorney’s help) spot a handful of techniques to reduce your estate taxes. But let me point out the obvious ideas.

Relocate Out of State

The first obvious gambit for anyone facing a large Washington state estate tax liability? Relocate to just about any other state. A no-income-tax state like Nevada, Florida or Texas maybe works best. But any other low-income-state western state like Arizona, Idaho, Montana or Utah works well too.  Washington’s top 35% estate tax is by far the highest in the nation. And most other western states (Oregon excepted) levy no estate tax.

Note: Relocating subjects you to a new state’s income taxes, if any. But even with high income tax states (like California), paying income taxes over decades may often cost less than paying estate taxes.

A caution: If you move out of state but keep a home in Washington state, your estate applies the same pro rata formula described in example 4 with the difference that your intangible property gets “sourced” to your new state.

Example 5: A taxpayer with a $22,000,000 estate knows that without any tax planning, his estate will owe $5,430,000 of estate taxes. Thus, he terminates his Washington state domicile, relocates to Austin, Texas, and clearly establishes his new domicile there. He keeps his Washington state home, however, valued at $2,200,000. That means he still holds 10 percent of his estate inside Washington and so will need to pay 10 percent of $5,430,000, or $543,000, in Washington state estate taxes.

Gift Either to Heirs or Charities

Washington state levies no gift tax. Thus, a taxpayer can save her or his estate from paying state estate taxes by gifting large amounts to heirs pre-mortem. The only wrinkle here is that federal gift taxes paid within three years of the death get added back to the Washington taxable estate. ( Consult your tax advisor if that is potentially your situation.)

Charitable gifts to organized charities should also reduce the taxable estate.

Example 6: A single taxpayer with a $12,000,000 estate knows his estate will pay $1,930,000 in estate taxes if he dies without reducing the taxable estate’s size. Thus, he gives away $1,000,000 to each of two children while alive and makes a $1,000,000 testamentary charitable contribution. Those gifts reduce the estate from $12,000,000 to $9,000,000 and drop the estate tax from $1,930,000 to $1,070,000.

Move Assets Out of State

A taxpayer reduces her or his Washington taxable estate by purchasing real estate or holding tangible personal property out of state.

Example 7: Another single taxpayer with another $12,000,000 estate also knows her estate will pay $1,930,000 in estate taxes if she dies without reducing the estate’s size. She buys a $2,500,000 home in Palm Springs and moves $500,000 of artwork and collectibles from her Seattle home to her new Palm Springs home. If she later dies with not 100 percent but only 75 percent of her estate inside Washington state? She reduces her estate tax from $1,930,000 to 75 percent of $1,930,000, or $1,447,500.

Bigger Fish to Fry

One other gambit (or non-gambit?) to mention. Maybe you don’t worry about this Washington estate tax stuff. Or at least don’t worry about it very much. Don’t get me wrong. The new estate tax rates seem like terrible tax policy for a  bunch of reasons.

But what I’m thinking here: You living close to friends and family? Staying connected to the community network you’ve spent decades building? That stuff is pretty valuable. Probably more valuable than the estate tax most taxpayers will pay.

Thus, unless avoiding the Washington state estate tax makes a big difference to your heirs? You may have bigger fish to fry here. Seriously.

A Closing Technical Point about Inflation

As mentioned earlier, Washington state law adjusts the $3,000,000 exclusion amount and the up to $3,000,000 qualified family-owned business interest deduction amount for inflation. Thus, for estates of decedents who die in 2026 or later years? Inflation will surely push up these amounts. That $3,000,000 applicable in 2025 amount might grow to $3,100,000 in 2026 or 2027.

But a technical point: No inflation adjustment occurs for the dollar values in that table of estate tax rates and brackets. Washington state tax law ignores the effect of inflation for those amounts. That ignorance maybe doesn’t sound like a big deal. But if annual inflation runs 3-percent roughly, it steadily reduces the size of that band of lower rates that average 21 percent-ish. Thus, over time, more estates will pay that 35 percent tax rate on a portion of their estate’s value.

Want to Estimate Your Estate’s Tax?

If you want to experiment with your estate’s possible estate tax burden, you can use this calculator: Washington Estate Tax Calculator

The post Planning for the 35% Washington State Estate Tax appeared first on Evergreen Small Business.

Deductions Protect Most Taxpayer’s Estates

Fortunately, the state provides a couple of big deductions and both are enlarged starting July 1, 2025: A standard $3,000,000 deduction that everyone gets. (Prior to the new law, the standard deduction was $2,193,000.) And that single deduction means most people’s estates don’t pay the state estate tax.

Further, a qualified family-owned business interest deduction that can technically shelter as much as another $3,000,000 starting July 1, 2025. (Before that date, the qualified family-owned business interest deduction equaled $2.5 million and wasn’t indexed for inflation.) That extra deduction potentially means small business owners’ families and heirs can sometimes avoid state estate taxes on as much as $6,000,000 of their estate in late 2025.

Someone who dies in the last half of 2025 with a $10,000,000 estate, for example, might shelter as much as $6,000,000 from estate taxes and then only have their estate pay estate taxes on the remaining $4,000,000.

But it’s tricky. So, let’s go over the details.

Qualifying for the Qualified Family-owned Business Interest Deduction

The “qualified family-owned business interest deduction,” or QFOBI deduction, burdens taxpayers with a handful of requirements.

First, the business must be an active trade or business. A passive business can’t use this deduction. Estates, for example, can’t use this deduction for real estate investments.

Second, the business must represent more than half of the estate and be worth $6,000,000 or less. (These twin requirements mean, practically, the estate needs to include a business interest that makes up more than half of an estate no larger than $12,000,000.)

Third, either the decedent or a family member must have materially participated in the business for five of the eight years before death by working 35 hours a week or in a hands-on managerial role.

Note: The QFOBI deduction doesn’t use the popular Section 469 material participation rules from Regulation 1.469-5T(a) but older estate-related rules from Section 2032A(e)(6). Those regulations treat ~35 hrs/week (or season-long full-time for seasonal operations) as a safe harbor, but a well-documented managerial role can also work.

Fourth, at least one family member or in a pinch a key-employee with ten years of employment needs to work full-time for the three years that follow the date of death. (Practically, this probably means any family member like an heir needs to be working in the business before the date of death.)

But meet these requirements and the estate probably slides another big chunk of estate out of the taxable category and into the non-taxable category. That move may save hundreds of thousands of dollars.

Examples of QFOBI Deduction Working

Let me provide a couple of examples of the qualified family-owned business interest deduction working. All examples will assume the taxpayer dies during the last half of 2025.

Example 1: Martha has an active business worth $5,000,000 while the remaining assets in the estate are worth $4,000,000. Thus, the total estate is $9,000,000. Her son materially participated in the operation for the five years prior to her death and will continue to operate the business for the three years following her death. The estate may deduct $3,000,000 of the $5,000,000 small business. The estate may also take another “standard” $3,000,000 deduction. That leaves $3,000,000 of leftover, taxable estate. And in the last half of 2025, that estate would trigger about $400,000 of Washington state estate tax. (Compare this example to example 3 below.)

Example 2: John has an active business worth $6,000,000 while the remaining assets in the estate are worth $5,999,999. Thus, the total estate is $11,999,999. His son, also named John, materially participated in the operation for the five years prior to his death and will continue to operate the business for the three years following his death. The estate may exclude $3,000,000 of the $6,000,000 small business. And the estate may also take another “standard” $3,000,000 deduction. That leaves $5,999,999 of leftover, taxable estate. And in the last half of 2025, that estate would trigger about $1,100,000 of Washington state estate tax. (Compare this example to example 4 below.)

Tip: We have a simple calculator you can use to estimate Washington state estate taxes: Washington State Estate Tax Calculator 2025 Version.

Examples of QFOBI Deduction Not Working

Let me provide a couple of examples of the qualified family-owned business interest deduction not working.

Example 3: Thomas has an active business worth $4,000,000 while the remaining assets in his estate equal $5,000,000. Thus, the total estate is $9,000,000, the same total as in Example 1. He materially participated in the operation for the five years prior to death and an adult child, already working in the operation, will continue to operate the business for the following three years. The estate may not exclude $3,000,000 of the $5,000,000 small business because the business does not represent 50 percent or more of the estate. The estate only will get to take the “standard” $3,000,000 deduction. That leaves $6,000,000 of leftover, taxable estate. And in the last half of 2025, that estate would trigger about $1,000,000 of Washington state estate tax. (Compare this example to example 1 above.)

Example 4: George has an active business worth $6,000,001 while the remaining assets in the estate are worth $5,999,999. Thus, the total estate is $12,000,000. His son, also named George, materially participated in the operation for the five years prior to his death and will continue to operate the business for the three years following his death. The estate may not exclude $3,000,000 of the $6,000,001 small business because the business value exceeds $6,000,000. The estate may however take the “standard” $3,000,000 deduction. That leaves $9,000,000 of leftover, taxable estate. And in the last half of 2025, that estate would trigger about $1,900,000 of Washington state estate tax. (Compare this example to example 2 above.)

Common Trip-wires

Easy-to-make mistakes can torpedo the qualified family-owned business interest deduction. Thus, let me quickly summarize these.

Day-1 Participation Gap

If no heir or other family member or ten-year key employee is already on the payroll when Mom or Dad dies, the three-year clock possibly can’t be met. (A ten-year key employee can stand in if no family member can.) Thus, families wanting to use this deduction need to plan now—and avoid post-mortem scrambling.

Tip: Probably material participants also want to document their work. Timesheets, management minutes, crop plans—anything that shows hands-on control—may make a difference.

Self-employment Tax Mismatch

The estate regulations presume material participation when the taxpayer paid SE tax. If past returns lack a Schedule SE, expect the Washington Department of Revenue to press hard on use of the deduction.

Business Worth > $6 million

One final trip-wire to mention. The new version of the Washington state estate tax (ESSB 5813) lifts the QFOBI deduction cap from $2.5 million to $3 million for deaths on or after July 1, 2025, and adds annual CPI indexing thereafter. Thus, the deduction grows with inflation starting in the calendar year 2026.

However, the business worth cap of $6 million is frozen. Thus, while the potential QFOBI deduction will get bigger each year, the number of firms eligible (because they’re worth $6 million or less) will shrink with inflation. Thus, keep this economic reality in mind for planning. Especially if the business valuation you’ll be using is one in a decade or two… or three

Gut-check on the Qualified Family-owned Business Interest Deduction

One final comment: The QFOBI deduction is tricky to use. As you now know if you didn’t before, the requirements an estate needs to meet are pretty limiting. Between you and me? What the state legislature cooked up here, about as absurd as it gets.

But that said, if you’re in a situation where your family or your clients operate a small business that represents the major share of their wealth? You want to at least think about using the QFOBI estate deduction. It’s often (as the examples above show) going to save hundreds of thousands of dollars. And even a million dollars in some cases.

The post Washington’s Qualified Family-Owned Business Interest Estate Tax Deduction: Updated for 2025 appeared first on Evergreen Small Business.

To estimate the Washington state estate tax someone might owe under the new 2025 law’s rules, use the Washington State estate tax calculator shown below. Instructions and additional information appear below the calculator input and outputs.

Instructions for Washington State Estate Tax Calculator

You need to describe an estate using the roughly half a dozen inputs. And the three things to know are as follows:

First, Washington state subtracts the following items from your taxable estate: Liabilities, spousal transfers, estate administration costs, charitable contributions and then a new “standard” exclusion equal to $3,000,000 starting July 1, 2025 and then some higher, inflation-adjusted amount in later years.

Note: A special qualified family owned business interest deduction also exists and that can amount to another $3,000,000 roughly. But that deduction is very difficult to use and rather problematic.

Second, if you have out of state real estate, the formulas adjust for this. Washington state doesn’t tax its residents on real property held out of state. (Those other states, by the way, might.) But as an example, if someone holds real estate outside Washington state that amounts to 25 percent of the person’s estate? Washington state only taxes the remaining 75 percent.

Third, the actual tax calculation uses a sliding scale which starts at 10 percent and rises to 35 percent.

Some Other Stuff to Know

Some other things helpful to know:

A wrinkle for people who hold real property inside or outside of Washington state: The values you enter for that property in the “Washington state assets” and “Non-Washington state assets” boxes need to be net of any nonrecourse debt like mortgages the decedent isn’t personally liable for. Use the liabilities box to show only the total recourse liabilities.

You ought to consider the calculation results an estimate. They do give you a good sense of the taxes an estate pays.

Finally, these generalizations maybe help. Fewer estates will need to file estate tax returns under the new law due to the higher, inflation-indexed threshold going forward. And the new law’s higher tax brackets don’t really “kick in” until someone’s estate hits $10,000,000 if single or $15,000,000 if married. But at estate sizes larger than these amounts, the new estate tax becomes strikingly large. Affected taxpayers will want to update their estate and business plans. And probably many will want to consider relocating outside of Washington state. (The tipping point is probably about $30 million of net worth.)

Other Resources

More information about and the text of Washington SB 5813 appears here.

To compare the new bill’s tax to the prior one, you can use this earlier version of the calculator.

The post Washington State Estate Tax Calculator (2025 Version) appeared first on Evergreen Small Business.

A quick review. Washington requires a return when the value of everything you own at the date of your death exceeds $2,193,000. So with current real estate prices in Washington? Your house probably puts you pretty close to that number.

But a proposed amendment might finally fix the weird legislative glitch preventing the exclusion amount from keeping up with inflation. Even better, a recently enacted change to the Washington estate tax statute could allow you to exclude the value of your home if it passes to your surviving spouse at your death.

Let’s look at what has and hasn’t changed (yet) that might determine whether your estate must file a Washington estate tax return.

The Bad News

First, what hasn’t changed: the $2,193,000 applicable exclusion amount.

Initially set at $2,000,000, the law called for updating the exclusion amount annually to account for inflation. And it specifically named the BLS index to be used in figuring each year’s new amount. Sounds fair enough.

The problem? That index no longer exists. In 2018 the BLS revised its geographic sampling methods and now publishes the relevant CPI data under a new name. So when the Department of Revenue prepares to issue guidance on a new exclusion amount every year? It looks for changes to the very specifically named index. Finding no change, the DOR has no choice but to require returns for gross estates worth more than $2,193,000.

The legislature has acknowledged the issue. House Bill 1484, first introduced in early 2023, would update the applicable exclusion amount to $2,659,000 for estates of decedents dying on or after August 1, 2023.

It would also remove any reference to a specific index. Instead, the amended statute would adopt a more general approach to inflation adjustment. It would simply reference the relevant statistic for “the geographic area sample that includes Seattle and surrounding areas.” That should prevent the glitch from reoccurring.

Unfortunately, House Bill 1484 didn’t make it out of the WA House of Representatives in 2023. And though legislators tried again during the 2024 regular session, no further action was taken. But the House’s 2025 regular session begins January 13, 2025. So maybe the third time’s the charm?

The upshot: if the value of your gross estate exceeds $2,193,000 at the date of your death? Your estate still owes a Washington estate tax return. But keep reading for a little good news.

The Good News

That primary residence putting your estate above the filing threshold? You can probably exclude it if you’re married when you die and your estate meets a few other requirements.

While the bill pegging the exclusion amount to a new inflation index languished in the House, a separate proposal flew through both legislative bodies during the 2024 session. House Bill 1867 made it onto the Governor’s desk and under his pen in March 2024.

The new law updates the estate tax statute that determines when an estate must file a return. Specifically, it amends the statute to provide that no return is required if three conditions are met.

First: your estate must not have a separate requirement to file to make a specific election. For example, if your estate planning anticipates making a QTIP election at the state-level? Your executor will have to file even if the exclusion of your primary residence would otherwise put your estate under the threshold.

Second: your surviving spouse must receive your interest in the primary residence upon your death. For example, if the home passes to someone other than your spouse? Or if it funds a bypass trust meant to preserve your Washington state exclusion? Your estate will have to include the value of the home. Note that Washington law treats registered domestic partnership couples as spouses.

Third: the value of your gross estate after excluding the principal residence must fall below the applicable exclusion amount. If your other assets put you over the threshold before even considering your principal residence? A return is due. And your gross estate as reported on that return will include the value of your primary residence.

The DOR has additional information, and some good examples, here.

The post Washington Estate Tax Spousal Personal Residence Exclusion appeared first on Evergreen Small Business.

Note: For estates created on or after July 1, 2025 use the updated calculator: Washington state tax calculator (2025 Version.)

Instructions for Washington State Estate Tax Calculator

You need to describe an estate using the roughly half a dozen inputs. But the two things to know are as follows:

First, Washington state subtracts the following items from your taxable estate: Liabilities, spousal transfers, estate administration costs, charitable contributions and then a “standard” exclusion equal to $2,193,000.

Second, if you have out of state real estate, the formulas adjust for this. Washington state doesn’t tax its residents on real property held out of state. (Those other states, by the way, might.) But as an example, if someone holds real estate outside Washington state that amounts to 25 percent of the person’s estate? Washington state only taxes the remaining 75 percent.

The actual tax calculation uses a sliding scale which starts at 10 percent and rises to 20 percent.

One wrinkle for people who have real property outside of Washington state. The values you enter for that property in the “Washington state assets” and “Non-Washington state assets” boxes need to be net of any nonrecourse debt like mortgages the decedent isn’t personally liable for. Use the liabilities box to show the total recourse liabilities.

You ought to consider the calculation results an estimate. But they do give you a sense of the taxes an estate pays.

Other Resources

From our CPA firm website: Washington State Estate Tax Returns: When to File and Pay Taxes and Washington State Estate Tax Planning Tactics

Raemi Gilkerson, a local attorney in Redmond, did a very useful guest blog post that you will find informative: Washington Estate Tax Worries: 3 Tips Save Thousands.

Finally, additional details about the estate tax appear on the Washington Department of Revenue website: Washington State Estate Tax Tables

The post Washington State Estate Tax Calculator appeared first on Evergreen Small Business.