Published November 2002

State, federal ‘tax free’ estates differ

By Mary T. Decker
Guest Columnist

If you think your estate will be free from estate tax because your net worth is under $1 million this year, you might be in for a surprise.

The “tax free” estate that Washington state recognizes is $700,000, not $1 million. As a result, many estates that are not taxable for federal purposes will be liable for Washington estate tax.

Historically, Washington state has conformed with federal law changes. The state has maintained a simple “pick-up tax” system for many years by simply tying the state’s tax to the maximum allowed as a credit for state death taxes at the federal level. In the past, if there was no federal tax liability, then there would be no state tax liability.

The federal and state laws are now different due to the passing of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).

EGTRRA provided for the increase in the estate tax exemption to $1 million in 2002 and on up in future years. EGTRRA also called for a phase-out of the state death-tax credit, replacing it with a deduction for state death taxes. The effect of the second item was to pass on to the states more of the burden of this tax reduction.

In light of the potential revenue loss to the state combined with the current budget crisis, the Washington state Legislature decided not to recognize the federal government’s 2001 tax law changes. So the exemption increase, which was scheduled under pre-2001 tax law, to $700,000, is the one that now exists in Washington state.

As an example of the effect of the change, in 2002, for an estate of $1 million (where no tax will be due to the federal government) the estate would owe $33,200 to the state of Washington. For taxable estates, the total estate tax bill will be more than what is computed under federal law, because of the phase out of the state death-tax credit. The same amount will be paid to the state, but only a portion will be credited against the federal tax.

In the year 2004, when the federal exemption is $1.5 million but the state’s is only $850,000, and 75 percent of the state death-tax credit has been phased out, an estate worth $1.6 million could face a total tax bill of $104,550 — more than 100 percent of the amount in excess of the federal exemption.

A class-action lawsuit has been filed by the Seattle law firm of Siderius, Lonergan and Martin LLP against the Department of Revenue, alleging that Washington’s estate tax must follow the federal changes. Information regarding paying the additional Washington tax under protest and/or joining in the class-action suit is available at www.estatetaxeswashington.com.

Consult your certified public accountant or estate-planning attorney for more information about how the Washington state estate tax affects your estate plan.

Mary T. Decker is a certified public accountant and financial planner with Hascal, Sjoholm & Co. P.S. of Everett.

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