The Problem.

Until 2001, the Washington estate tax was a "pick-up tax," a form of revenue-sharing by which the State took a portion that would otherwise be paid to the IRS. In that year, the Feds initiated a change to the scheme by greatly increasing the exemption for each estate. This promised to cost the states considerable revenue, so the State of Washington and many others reacted by refusing to go along with the increased exemption .

The Cost.

The added Washington estate tax is $64,400 for those dying (sorry - we had to use that word) in 2004 or 2005 with estates of 1.5 million dollars, even though there is no Federal estate tax for estates of this size. For the next three years, the Washington estate tax would be $99,600 for estates valued at two million dollars, even though such estates would be free of Federal estate taxes. For persons dying in 2009 with an estate valued at 3.5 million dollars, there would be 110 Federal estate tax, but the Washington estate tax would be $229,200. We can't see any further out than that; there will likely be further legislation, Federal or State or both, by the time of the projected one-year disappearance of the Federal estate tax in 2010. The additional Washington estate tax can apply even in the case, formerly tax-free, where there is a credit shelter trust created for the surviving spouse that attempts to fully take advantage of the Federal exemption.

What You Can Do About It.

There are numerous strategies for dealing with this "disconnect" between the State and Federal exemptions, including a move to another State. More common and more practical for most, however, are the following two options:

1. Married couples should have their Wills reviewed to see whether the added tax would apply to the surviving spouse. It might or might not, depending on the terms of the Will, and most Wills can be changed to defer or avoid it.

2. Tax-saving annual gifts take on added importance, particularly since Washington has no gift tax. Although gifts can be brought back in the estate for tax calculations, they still result in tax savings.

We encourage you to call us to find out whether the "disconnect" affects you, and if so, what may be done.