With historically high exemptions, fewer people are paying federal estate and gift taxes now than decades ago, but more Washington state residents should be aware of their potential state estate tax liabilities, some accountants here say.

Washington has the highest maximum estate tax rate of any state, at up to 20 percent of the estate value exceeding $2 million, with no taxes owed on estates valued at less than $2 million.

The state, however allows one big loophole in that it doesn’t charge a gift tax, meaning there’s not state taxes on gifts bestowed by individuals during their lifetime, says David Green, principal at David Green CPA LLC, of Spokane. 

“The easiest way to avoid Washington’s estate tax is to give the estate away the day before you die,” he says.

Because people don’t know when they’re going to die, they might want to give assets away in later life, or change residency to a more tax-friendly state, Green says.

“One possible downside of changing residency is you actually have to move,” Green says. ”You can’t live in Spokane and file as if you live at the lake place in Idaho.”

Another downside is that if the client lives long enough, the estate tax savings could be offset by other taxes in certain other states, such as Idaho’s state income tax.

Washington state has a low exemption threshold of $2 million relative to the inflation-index adjusted exemption of $5.34 million for federal estate taxes.

The federal lifetime gift-tax exemption is tied to the estate-tax exemption, meaning individuals can bequeath up to $5.34 million with no tax liability during their lifetime. The amount of such gifts is subtracted from the estate tax exemption.

While the maximum federal estate tax rate jumped to 40 percent in 2013 from 35 percent in 2012, the tax rate still is lower than it was 25 years ago, Green says, adding that the exemption often can total $10.68 million for a married couple.

“The nice thing about community property is that the exemption times two is pretty much a truism for married couples,” he says.

For couples that have separate property, a qualified adviser can help plan around that so each has the maximum exemption, Green says.

“We have a whole boatload of people who used to be subject to federal estate tax and aren’t any more,” he says, adding, however, “If you’re part of that lucky few—less than 1 percent—the amount of estate tax is still large, and it’s a double whammy for those that live in Washington.”

If an estate is subject to the federal estate tax, it’s definitely subject to Washington’s estate tax at the highest rate, he says.

Green says he worked with one client within the last few years who knew he was going to die. Green, the client’s attorney, and the client and family developed a plan to protect assets from estate taxes.

The client, whose estate was valued at just under $5 million, put $3 million in a trust for the benefit of the family, taking advantage of the fact that Washington state doesn’t tax gifts. When the client died, the remaining value of the estate was below the Washington estate-tax threshold.

Green says it’s unfortunate that there’s less awareness about the state estate tax, which affects more people in Washington than the federal estate tax. He had one client who didn’t know about the state estate tax until his father died.

“The taxes could have been avoided had he known,” Green says.

Andrew McDirmid, a partner at the Spokane office of Fargo, N.D.-based Eide Bailly LLC, says he advises clients to be aware of tax rates and exemptions at both the federal and state levels when they draw up wills or living trusts.

“I’ve seen folks getting into the later part of life making the decision to domicile elsewhere,” McDirmid says.

To some clients, it’s important to leave as much of their assets to beneficiaries as they can, he says.

“Others don’t prioritize it that way,” McDirmid says. “They don’t let the estate tax dictate where they’re going to domicile.”

Those who do decide to move out of state also are looking at places with good health care facilities. Across the Idaho border, for example, Kootenai County has several facilities that provide high levels of health care, he says.

Those considering the move to Idaho also should consider whether they want to take on the burden of a state income tax, McDirmid says.

“Most of the population can reduce their estate tax burden to nothing if they are committed to administrative complexities and giving away some of their assets to beneficiaries and charities,” he says.

Valerie Perry, Eastern Washington-based chairwoman of the estate planning practice group for Seattle-based accounting firm Moss Adams LLC, also says estate planning often includes gifting strategies to reduce estate tax liability.

While the fate of the federal estate tax rate had been uncertain the few years prior to 2013, it likely will remain at its current rate for the foreseeable future, Perry says.

“There’s not a lot of push in Congress to eliminate or reduce the estate tax,” she says. “It would be a tough revenue base to replace if it were to be eliminated.”

As for the state estate tax, Perry says there’s always talk about changing that.

The Washington state exemption threshold at one time was aligned with the federal exemption, but hasn’t kept up with it as Congress bumped the federal threshold higher, she says.

“Several years ago, when the Washington exemption became different than the federal exemption, it caused a lot of uproar,” Perry says. “Some high-net worth individuals moved to other states that have lower, or no, estate taxes.”

Perry says a new law this year allows an estate tax deduction of up to $2.5 million for qualified family-owned businesses that pass on to heirs, on top of the $2 million estate tax exemption.

She says the business must be family owned for five of eight years prior to the decedent’s death. The value of the business must be less than $6 million to qualify for the exemption, and the business has to be more than half of the total estate.

The business must be passed to a family member and stay with that owner for three years, Perry says.

A similar rule has been in place for a number of years regarding family farms, with no limit to the deduction for qualified farm property, she says.

To qualify for the family-farm exemption, the value of the farm and related equipment must exceed 50 percent of the estate value.

Unlike with the family-business deduction, heirs to a family farm don’t have to keep it in production and can sell it without affecting its deductibility, the Washington state Department of Revenue’s website says.

Perry says starting this year, the Washington state estate tax exemption will be indexed with inflation. It had been set at $2 million since 2006.