Two Key Differences Between Washington State and Federal Estate Tax

Estate taxes are among the most confusing topics, especially for those who live in a state like Washington. So, you’re not alone if you feel a bit in the dark about how it works. Estate taxes are assessed at death on your total net worth value above an “exemption”, the amount you can pass tax free. There are two levels of estate tax: the federal estate tax and, for 12 states (including our home state of Washington), state-specific estate taxes. To further complicate things, each has its own exemption with different rules. But if you live or own property in Washington State, understanding how the tax and exemption differ is critical to putting the right strategies in place. Here’s a brief overview of how the federal and Washington State exemptions work and key differences to be aware of.

Federal estate tax exemption

The federal estate tax exemption is the amount of money or assets that can be passed on to heirs without being subject to federal estate taxes.

• For 2024, the federal estate tax exemption is $13.61 million per individual, so if the value of your estate is less than $13.61 million at death, your estate will not owe any federal estate taxes.
• If your estate exceeds this amount, the value above $13.61 million is subject to federal estate taxes, which can be as high as 40%.

Washington State estate tax exemption

Washington state also has its own estate tax, which is separate from the federal estate tax.

• For 2024, the Washington state estate tax exemption is $2.193 million per individual, so if your estate value is less than $2.193 million, your estate will not owe any Washington state estate taxes.
• If the estate exceeds this amount, the value above $2.193 million is subject to state estate taxes, which can range from 10% to 20%.

Two key differences between Washington State and federal estate taxes

There are some important differences here between the federal exemption and the Washington State exemption, including exemption amounts and tax rates, but two key points require careful consideration and understanding:

Portability: This is one of the most important differences to note. The federal exemption is portable between spouses, meaning any unused exemption can be transferred to the surviving spouse. Washington state does not allow this transfer, so without proper planning, a couple would only get one exemption if a spouse dies, automatically leaving everything to the surviving spouse.

Assets subject to tax: The federal tax applies to all assets you own. Washington State provides an exclusion ratio for assets like real estate or business interests owned out of state. They also tax real estate in Washington even if you are not a Washington resident. This can be confusing, so we’ll include an example below.

While this is not an exhaustive list of the differences between the two estate taxes, these are two important differences to understand and plan for.

Washington State estate tax and out of state property – a calculation example.

As covered in Washington State’s Estate Tax FAQ, “All property owned by a decedent must be included on the estate tax return. The estate tax is calculated on the entire estate as if all property is in Washington, then a calculation is done to apportion the tax between the Washington property and the out of state property.”

What does this mean practically? The state’s Out of State Property Calculation page defines out of state property and provides the following calculation example:

Samantha, a Washington resident, dies leaving a gross estate of $4.1 million. She owned a second home in Arizona valued at $300,000 and real property in South Dakota valued at $750,000. The estate had $100,000 in expenses deductible for estate tax purposes and the applicable exclusion amount is $2,193,000.

Under the facts of this example, Samantha’s estate has a Washington taxable estate of $1,807,000, computed as shown below:

• Gross estate: $4,100,000
• Less deductions: ($100,000)
• Less exclusion: ($2,193,000)
• Taxable Estate: $1,807,000

If all property were in Washington State, the Washington estate tax due would be $212,980. However, because the property in Arizona and South Dakota are out of state, an “apportionment formula” is applied to determine how much tax is due. The formula is:

• Apportioned tax due = ((gross estate – out of state property) / gross estate) x pre-apportioned Washington estate tax

In Samantha’s case, her estate’s “apportioned Washington tax due” is $158,436, calculated as follows:

• (($4,100,000 – $1,050,000) / $4,100,000) x $212,980 = $158,436

With the process to identify Washington State tax due outlined, if you find yourself subject to a potential tax, here are a few resources to help!

Resources to help plan for Washington State and federal estate tax.

As with all estate and tax planning, it’s important to consult your financial advising, estate, and tax planning professionals about your specific situation. With added clarity around the differences between the federal and Washington State, how do you find out if you’re at risk of paying estate tax? And how can you reduce that tax? We have resources for you!

Use our Estate Tax Risk Calculator to find out if you could be subject to estate tax. And for strategies to avoid or reduce the estate tax, see Should I Leave Washington State to Avoid the Estate Tax and our archive of Estate Tax Planning & Strategy articles!