By: Michael Gunning
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Reduce Your Washington State Estate Taxes for 2020
An estate tax is a tax on your assets when you pass away. The IRS has determined that for 2020, federal estate tax generally only applies to accrued assets beyond $11.58 million in value. Most existing estate tax rates range from around 18% to 40%. The cut-off for Washington State Estate Tax 2020 is currently set at $2.193 million. Those with assets valued under this figure should not be concerned about the estate tax.
Some US states have also chosen to enforce their own estate taxes. It’s important to note that any assets inherited by spouses generally won’t be subject to these types of estate tax.
IRS Form 706 has additional details on the specific assets that are going to count for these kinds of calculations, as well as how you can go about finding their value and how to calculate your taxes.
Am I going to be required to pay taxes on my estate?
The answer for most is probably not. The IRS exempts estates of less than $11.58 million from the tax in 2020 and $11.7 million in 2021, so few people actually end up paying it. Plus, that exemption is per person, so a married couple could double it. The IRS taxes estates above that threshold at rates of up to 40%.
What is the difference between an estate tax and inheritance tax?
Very few states have an inheritance tax, which is different in that heirs pay the tax instead of the individual who passed away. In our state, we only have the Washington State Estate Tax to worry about.
There are actually only six US states that collect an inheritance tax, with one state choosing to maintain both an estate and inheritance tax. It would be wise to research state laws if you are considering retiring in another state’s jurisdiction, as the laws do vary quite a bit.
These inheritance tax rates traditionally rely on an heir’s relationship to the deceased to determine tax liability. In most cases, the surviving spouse will often be exempted from state-level inheritance taxes.
There are still a few states which choose to tax the deceased person’s kids, albeit at a lower rate. These rules are often designed to give more money to close relatives than more distant ones. You might immediately think of those distant relatives across the country who you only see at the family reunion every 20 years.
Distant heirs who aren’t directly related to the deceased will usually be the ones to face higher inheritance tax rates.
10 Recommendations for Washington State Estate Tax in 2020:
If your goal is to reduce your estate taxes before you pass away, there are a few different strategies you can use to safeguard your assets.
- Spend down your assets. If you do not fear having a lack of money towards the end of your life, simply enjoy your wealth.
- Spread your assets around. You can choose to give away small parts of your estate in the form of gifts to your loved ones while you’re still alive. Many states don’t have a gift tax.
- Giving away your assets. You can always leave your property to a qualified charity 501(c)(3), these values will be deducted from your gross estate.
- Shield assets inside a trust. With a properly designed irrevocable trust, you may be able legally shelter a portion of your assets from state and federal estate tax liabilities.
- Move to a favorable tax environment. Most states do not collect an estate tax or inheritance tax, so you should have abundant relocation options.
Additional Notes on Washington State Estate Tax:
- If you are going to inherit valuable assets, or you will be bequeathed something, always be aware of capital gains taxes.
- Even if an inheritance isn’t taxed when your heirs receive it, any subsequent earnings or income that it produces may be considered taxable capital gains at the federal and state levels.
- If your heirs sell an asset they inherited, any profit could be taxed at the federal level as either a long-term or short-term capital gain, depending on when they dispose of the property.
- If you do give your heirs a bequest, especially a sizable one, it’s a good idea for them to talk with a professional who specializes in estate taxes about the best ways to minimize any potential tax bite.
If you find yourself having more questions than answers and you’d like to speak with one of our estate planning experts to better understand your tax liabilities, don’t hesitate to contact our office at 509-328-2150 to schedule a consultation.
With more than 20 years of estate planning experience we’d be happy to help your family gain peace of mind knowing your financial situation is secure.
View this resource from the Washington State Department of Revenue to view the Tax Tables.