Washington state currently imposes its own estate tax on estates worth more than $2 million. So if you are a state resident and leave that much money at your death (or if you're a nonresident but own valuable property in the state), your estate may owe tax to the Washington Department of Revenue. Depending on the federal estate tax law in effect at your death, your estate may or may not owe estate tax to the IRS; for deaths in 2014, estates of less than $5.34 million do not owe federal estate tax.
Which Estates Must File and Which Must Pay
Whether or not your estate will owe Washington estate tax depends on the law that’s in effect in the year of your death. For deaths in 2013, if the gross estate of a Washington resident has a value of more than $2 million, the executor must file a state estate tax return. The estate of a nonresident might also owe Washington tax, if the deceased person owned valuable real estate (or other tangible property items) in the state.
Many estates that must file an estate tax return don’t actually end up owing tax. That’s because any property left to the surviving spouse or a tax-exempt charity passes free of estate tax, and because some expenses reduce the size of the taxable estate. So the estate may be over the filing threshold but not owe tax.
It’s your executor’s duty to file any estate tax returns that are required. If your estate doesn’t go through probate—meaning no executor is appointed by the probate court—then the people who inherit your property, or the trustee of your living trust are responsible for filing the return.
To determine whether or not filing a Washington estate tax return is necessary, the executor will total up the value of the assets you owned at your death, including:
- Real estate
- Bank accounts
- Investment accounts (stocks and bonds, mutual funds)
- Proceeds from life insurance policies on your life, unless you don’t own the policy at your death
- Retirement account funds
- Any interest in a small business (sole proprietorship, limited liability company, or small corporation)
- Assets held in a revocable living trust (or other trusts the deceased person controlled)
If you're married, your estate contains all of your separate property and half of the community property owned by you and your spouse. Unlike the IRS, Washington state does not require you to include in your estate the value of taxable gifts made during your lifetime.
If more than half of the value of your estate comes from real estate (and related items) used for farming, the estate can take a deduction for the value of the farming property.
No ‘Portability’ for Washington Spouses
Federal law allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her entire federal estate tax exemption, then the surviving spouse’s estate can use the unused portion of the first spouse’s exemption amount. This is called the “portability” provision of the law. Washington state, however, does not allow spouses to share their individual exemptions for state estate tax purposes.
Tax Returns and Payments
If a Washington state estate tax return is required, your executor will have to either file it nine months after the date of death or apply for an extension of time to file. An extension gives your executor more time to file the completed return, but estimated tax must still be paid on the original due date. If payment is late, penalties and interest start to accrue on the unpaid amount as of the due date. Taxes can be paid in installments if your estate contains a small business.
Tax return forms (there are two state forms; which one to use depends on the size of your estate) and instructions are available online from the Washington Department of Revenue.
Your executor may find this online information useful as background, but he or she will want to hire an expert to actually prepare the estate tax return, which is lengthy and complex. The fee may be a few thousand dollars, which can be paid from estate assets.