What Is the Difference Between Estate, Inheritance, and Gift Taxes in Washington?
The estate tax is often misunderstood. Many Washington residents assume they need to engage in complex estate planning just to avoid the possibility their heirs will owe the government money. But the current reality is that the vast majority of Washingtonians will not leave a sizable enough estate to trigger any estate tax obligations under federal or state law.
Estate vs. Inheritance Taxes
An estate tax is a levy on the right to transfer property upon the owner’s death. An estate tax should not be confused with an inheritance tax. An inheritance tax is a levy on the receipt of property from an estate. Estate taxes are paid by the estate, while inheritance taxes are paid by the heirs. There is no federal inheritance tax in the United States, and only a few states impose their own inheritance taxes. Washington has no inheritance tax.
Who Must File an Estate Tax Return?
Both the federal government and the State of Washington levy an estate tax. Some states like Idaho do not have a state estate tax. But most estates are not required to actually file or pay any estate tax based on their filing thresholds. Any portion of the taxable estate up this threshold is exempt from the estate tax. This means that if the total value of the taxable estate does not exceed the applicable threshold, no return needs to be filed.
The amount of the state and federal exemptions can change annually. The applicable threshold is the one for the year when the decedent passes away. For deaths that occur in 2023, the federal estate tax threshold is $12.92 million. In 2024 the threshold will increase to $13,610,000. The Washington estate tax threshold is much lower at $2.193 million and is unlikely to change in the near future. Still, even the lower state threshold will exclude most estates, but as the value of property increases, this will begin to change.
In the case of married couples, the federal estate tax exemption is doubled. When the first spouse dies, they can pass an unlimited amount of property to the surviving spouse without paying estate tax. If they file a 706 Estate tax return, the spouse can “elect portability” to transfer the first spouse’s unused credit to the surviving spouse. Then, when the second spouse dies, their estate can claim the their own exemption plus the exemption amount they receive from their deceased spouse.
Washington’s estate tax allows for the passing of property between spouses but not portability. In other words, when the second spouse dies, their estate can still only claim an exemption of up to $2.193 million.
Estate vs. Gift Taxes
The federal government, but not Washington, also imposes what is known as a gift tax. The gift tax is a levy on transfers of property during the owner’s lifetime where they receive nothing or less than the full value in return. Essentially, the gift tax is designed to stop wealthy individuals from avoiding future estate tax liability by simply giving away all of their property before they die.
The gift tax involves two different thresholds. The first is a limit on the amount of gifts you can give to a single person every year without incurring any liability. For 2023, this limit is $17,000 per person (or $34,000 per person for married couples.) In 2024 the limit increases to $18,000 per person ($36,000 per person for married couples.) Even if you exceed this per-person threshold, however, you can still avoid paying gift tax so long as you remain below the lifetime gift tax exclusion, which is equal to the federal estate tax exclusion.
Speak with a Spokane Estate Tax Lawyer Today
If you are concerned that you may be liable for estate or gift tax at some point, it is essential to consult with a qualified Spokane estate planning lawyer. Contact Moulton Law Offices today to schedule a consultation or attend one of our seminars.