Estate planning is crucial for everyone, but in Washington State, it's especially important for married couples due to the unique state tax laws. While many people think they don’t need to estate plan because they will leave everything to a surviving spouse, this approach can result in significant tax liabilities that could have been avoided with proper estate planning.
Understanding Federal vs. State Estate Taxes
Most people don't need to worry about federal estate taxes because the exemption is currently set at $13.61 million per person, or $27.22 million for married couples. This means that only a tiny fraction of estates across the country are subject to federal estate taxes.
However, Washington State has its own estate tax with a much lower exemption—$2.193 million per person. This lower threshold means that many Washington residents, particularly those in the Puget Sound area with high property values, need to be aware of the state's estate tax implications.
Why Portability Matters—and It's Not Automatic in Washington
For married couples, federal law allows the unused portion of the first spouse's estate tax exemption to be transferred to the surviving spouse. This concept is known as "portability," and it effectively doubles the estate tax exemption for married couples. However, in Washington State, this portability is not automatic. Without proper planning, the first spouse's $2.193 million exemption could be lost, leaving the surviving spouse's estate subject to higher taxes.
Let's look at an example to understand this better:
Example 1: The "I Love You" Plan
Imagine a couple with a $4 million estate, consisting of a $1.5 million house, a $1.5 million retirement account, and a $500,000 life insurance policy for each spouse. If the first spouse to die leaves everything to the surviving spouse (a common approach known as the "I Love You" plan), the estate won't owe any taxes at that point because of the unlimited marital deduction. However, when the surviving spouse passes away, only their $2.193 million exemption applies. This leaves $1.8 million subject to Washington State estate tax, resulting in a tax bill of around $212,980.
Example 2: The Trust Plan
Now, consider the same couple working with a trust and estate attorney to create a trust. Upon the first spouse's death, a trust is established for the surviving spouse's benefit. The $2.193 million exemption is applied to the assets in the trust, so no tax is owed. The surviving spouse can still use the assets during their lifetime. When the second spouse passes away, their $2.193 million exemption applies to their estate, and no estate tax is due. This approach effectively shields the couple's entire estate from Washington State estate taxes.
Conclusion: Don't Let Simplicity Cost Your Family
While it may seem simpler to leave everything to a surviving spouse, this approach can lead to unnecessary tax liabilities in Washington State. Working with an experienced estate planning attorney can help you create a plan that maximizes your estate tax exemptions and ensures that your wealth is preserved for your heirs. Proper estate planning isn't just about minimizing taxes—it's about protecting your legacy for future generations.
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