Washington state is one of several wonderful states with the delightfully named “death tax”, or estate tax. As you may have heard me discuss before, this is something worth planning around. When people consider their most cherished family, friends, and causes who will be their beneficiaries, very few voluntarily list the state. But without proper planning, the state can obnoxiously shove its way into a seat at the table by way of the tax.
You also don’t need to be a wildly wealthy family for this to matter (unlike the federal estate tax). Until now, families with a net worth of $2,193,000 or more in their estate, after a few possible deductions, would pay estate tax. Considering the average home value in Washington is $611,301 as of this entry, this tax has increasingly expanded to what we call the “mass affluent”--families who are doing reasonably well for themselves, but don’t usually self-identify as rich. Add personal property, retirement accounts, bank accounts, a rental or vacation home, a business, and the other assets many families have, and you could be unknowingly inviting this unwanted beneficiary to the table.
Starting July 2025, however, this changes. Washington state passed several new laws, and among them was a revamped estate tax. The $2,193,000 threshold has been raised to $3,000,000. This threshold is also going to rise each year to account for inflation, whereas it didn’t before. Hallelujah, right?
Maybe.
If you are a family with a $2,500,000 in net worth, for example, yes–this was good for you. You played musical chairs with your beneficiaries and WA state was the odd man out. Especially if you aren’t in accumulation mode and are spending down assets in retirement, this tax is unlikely to affect you.
If you are a high net worth family, however, this could be a completely different story. After the first $3 million is excluded, WA state starts taxing a much bigger piece of amounts above the exclusion than before. Until now, the top end tax rate was 20%. Starting in July, the top end rate becomes a whopping 35%--almost double!
A $15 million net worth family under the new tax brackets could wind up paying an extra $728,600 to Washington.
Of course, the state quickly points out that those families can handle it. While they aren’t wrong, no one appreciates the government suddenly holding their hand out for more. Especially when that hypothetical family was already paying $2,251,400 under the old rules.
So, what can you do about it?
A common solution to estate taxes is gifting. We can gift money to others and, provided we live at least 3 years from the gift, we don’t need to worry about that money being subject to the tax. It costs nothing to do and has very few downsides (provided you aren’t one of the wildly wealth families I mentioned earlier who need to worry about federal estate tax).
We can also give money to charity. Charitable contributions during life or in one’s estate documents can decrease your estate tax liability (and sometimes your income tax liability at the same time!), which is wonderful.
But what else is there? Many clients don’t want to drop money bags on their children for all kinds of reasons. I wrote about many considerations and ideas around that here.
Today, we are going to discuss an example of using a trust to minimize the estate tax while keeping the wealth in the family, staying sensitive to how the money might influence the family in the process.
Trusts are flexible things. Structured correctly, you can have a trust that removes assets from the estate, shielding them from estate taxes. You give up some control over the assets, but you can appoint a trustee to manage trust assets and execute your wishes. The trustee can be a family member or a corporate trustee, depending on what makes sense for your situation. The trust can help ensure your family is positively affected by your wealth.
Suppose you are over the $3 million exemption, or you will be before long. You may want to take assets that are going to continue to grow, and place them in the trust. This allows all the future growth to take place beyond the reach of the estate tax. You can then impose restrictions or guidelines to the trustee on how your children, grandchildren, or other family members might receive money or assets.
My adorable son Charlie is 1 year old–he has no idea what money is. But if Charlie was 19, he would know what money is. His prefrontal cortex would also still be growing, along with his emerging sense of self, passions, and motivation to make something of himself. If we plopped $500,000 in his hands to save estate tax, he may not spend it as wisely as he would when he was 30 or 40. It might even stunt his personal growth in ways that are hard to predict.
A trust could help here. It might contain language saying Charlie may receive limited income each year, receive money for a down payment on a home or other significant life event, or even impose a future age where he is entitled to part or all of the trust contents. All the while, the assets continue to grow for the day when he is ready to assume the responsibility that comes with significant wealth. As an important side note, the trust would play a crucial role in the event that I passed away by ensuring my wishes continue to be honored and executed.
The trust also fulfills another special function: again, structured properly the trust can protect Charlie. If someone tried to take Charlie to court for all that he was worth, the trust might be able to offer some protection from creditors. Whereas if he owned the money all outright, he could be on the hook if the litigious folks won their lawsuit.
That said, trusts are complex. Depending on how they are designed, the trust could pay more income tax–more than if you owned the assets directly due to different tax brackets. It also costs something to administer and create trusts. It takes planning to figure out if the juice is worth the squeeze. To really reduce estate tax, many families combine multiple trusts with different purposes together, often because estate taxes tend to hit twice–once when each spouse passes away. This makes trust planning even more complex.
For simple families well below the $3 million net worth now and in the future, we may not need to fiddle around with fancy, irrevocable trusts. But for some families, a trust can be a document that saves them hundreds of thousands or millions of dollars. And for families who are committed to intergenerational wealth, trusts can save many millions of dollars across multiple generations.
The moral of the story: do not be afraid to ask how trusts might be helpful for you or those you care about, and do not hesitate to ask if the new legislation affects you and your family. While we do not prepare estate documents for families, we are happy to read through what you have and identify any key concerns or opportunities in your estate documents. We are also happy to collaborate with your estate attorney to help ensure your estate documents align with your overall financial plan.
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