How Can I Avoid Paying Estate/Inheritance Taxes When I’m Gone?
Proper estate planning will allow you to reduce or eliminate the amount of estate taxes you pay upon your death and how much your heirs will inherit.
Estate planning is an important process that defines your assets and offers tools and customized strategies to best fit your situation and lifetime goals. During your career and after, accumulating wealth is important to provide for your family, pay for living expenses, education, and so much more.
In addition to safe-guarding and growing your wealth, estate planning is also designed to help you avoid taxes.
While tax evasion is illegal, tax avoidance is a common legal strategy and your estate attorney can advise you on the options most suited to your individual circumstances.
An important tax to understand in the State of Washington is the estate tax. While Washington does not have income taxes, or an inheritance tax levied on those who inherit an estate (a beneficiary), it does tax the estate of an individual who seeks to transfer wealth and assets to others at the time of death. Currently, Washington State tax is just over $2 million.
What is your estate?
As you begin the estate planning process, it is important to take inventory of your estate. Your estate is composed of everything you own, or in which you have an interest, including:
- Vehicles such as cars, boats, or airplanes
- Financial, retirement, and investment accounts
- Your residence and other real estate property
- Personal possessions, collections, valuable objects such as artwork or jewelry
- Anything with digital value, such as cyber-currency, or non-fungible tokens
- Insurance proceeds, cash, business shares, and other assets
Estate taxes are based on the total value of the estate. While this seems straightforward, the calculation can be complex. According to the Washington Department of Revenue (DOR), the value of an asset is “its cash value or unpaid principal plus an interest accrued to the valuation date.”. The value of the assets of an estate are determined as of the date of the death of the individual, or decedent, whose estate is at issue. The date of death is known as the valuation date.
In Washington State, there is also an individual exemption, or the amount of estate value that the DOR recognizes as exempt from the estate tax. At present, that amount is $2,193,000. Value above that amount will accrue an estate tax. While $2 million may sound like a significant sum, with the combined value of real estate and retirement benefits, or the addition of the value of the estate of a deceased spouse, that threshold can be quickly reached, causing the amount of estate tax owed to be significant.
How can you reduce the amount of estate tax to be paid?
Your estate grows and changes over time. Among other estate planning tools, everyone should create a Will and Healthcare Directive. An estate plan and the testamentary trusts that can be created through the use of your Will or trust can help you ensure your estate is protected in your lifetime and after.
Reducing the amount of estate tax owned is only part of the value of an estate plan. Your estate lawyer will create a comprehensive plan—a blueprint—to protect you, carry out your personal and medical wishes, and ensure your estate passes forward to your heirs according to your goals.
A well-crafted estate plan reduces losses to your estate through taxation or probate costs. As you work with your estate professional, consider these points:
- Probate: Probate is the legal process through which your estate is administered, debts are paid, and bequests are distributed to your heirs. Probate takes time and can be an unnecessary expense. Your estate plan can minimize probate costs and reduce the time your estate will be in probate.
- Trusts: Through your Will and estate plan, your estate lawyer will help you make use of specialized trusts to reduce or possibly eliminate estate taxes that would otherwise be due. For example, a credit shelter trust can be set up to receive the assets of a spouse upon the first to pass. When one spouse passes, their estate—and its value—pass into and fund the credit shelter trust that is set up for the surviving party. This type of shelter is known by several names, including a credit shelter trust.
Because the assets flow into a trust, the exemption of the surviving partner remains intact and payment of estate tax on the additional wealth is avoided. Trusts can be created to provide benefit to the surviving partner during their lifetime and eventually to the heirs. Upon the death of a spouse, will flow to those designated in the original Will of that person.
There are a variety of trusts that can be created through an effective estate plan to shelter assets and wealth for a surviving partner or to provide generational wealth to beneficiaries. An estate plan, and its sub-trusts, can also provide longer term protection to family through protections that work to protect inherited wealth. This includes protection from divorcing spouses, creditors, and bad financial decisions that are sometimes made when a family member suddenly inherits significant wealth without checks and balances.
- Gifting: The State of Washington does not generally tax financial gifts given to others prior to death. There are federal thresholds and exemption amounts but providing monetary gifts during your lifetime can reduce your assets that would exceed the estate tax exemption, while providing support to children and grandchildren while you are alive.
Estate planning is an important tool to grow, nurture, and preserve wealth throughout your lifetime—regardless of your age. Your plan reflects your wishes and direction for the wealth you have accumulated. Because life changes over time, an estate plan changes too, so it is a good idea to have your estate plan reviewed every ten years or after any major life change.
Whether you already have your estate plan or are just starting out, there is no time like today to start planning for the future. Speak with an experienced estate tax lawyer in your area to guide your planning process.
Speak with an experienced estate tax attorney in Spokane today
Evergreen Elder Law delivers straightforward, skilled guidance and legal service to seniors, families, veterans, and their spouses throughout Washington State. With offices in Spokane and the Tri-Cities, we offer full-service estate and special needs planning, long-term care planning and more. Attend our free webinar, Tax Avoidance Strategies – How to Avoid State and Federal Taxes Upon Passing. Contact us for a free consultation or call (509)325-5222 today. We are here to guide you through the estate planning process and explain all your options.