Eslinger Law Office

Tax Planning to Minimize Estate Tax

(the article presumes the husband is the first spouse to pass away)

Both Washington State and the Federal government impose an Estate Tax on a deceased person’s estate.  According to the IRS’s website: “The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706). The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets…”

EEach U.S. citizen and resident is given an estate tax exemption, an allowance below which no estate tax is due. For 2026, the Federal estate tax exemption is $15 million per person. A decedent’s taxable estate above this exemption is taxed at 40%. In contrast, Washington State’s estate tax exemption is $3,000,000.00 (fixed at that amount for the estates of decedents dying on or after July 1, 2026). A Washington taxable estate over this exemption amount is taxed at graduated rates of between 10% and 20%.  

The estate tax does not apply to a decedent for the portion of the gross estate that passes to a U.S. citizen spouse. (If the surviving spouse is not a U.S. citizen, this deduction is available only through a Qualified Domestic Trust, or “QDOT.”) However, if the deceased spouse’s estate is left to the surviving spouse outright, without tax provisions to preserve the deceased spouse’s WA estate tax exemption, the surviving spouse will only be left with one estate tax exemption, even though her estate has inherited the deceased spouse’s assets (the Federal government allows the deceased spouse’s unused exemption to be transferred to the surviving spouse (known as portability), but only if a federal estate tax return is timely filed; Washington does not).  In such a case, the surviving spouse’s estate will be liable for estate tax if her gross estate, which now includes the amount she inherited from the husband’s estate, exceeds the WA estate tax exemption.

The good news is…there is a way to preserve the deceased spouse’s estate tax exemption to double the estate tax exemption upon the death of the second spouse.  Moreover, all of the growth generated from the first spouse’s estate up to the exemption amount from the day the husband passed away to the death of the wife is exempt from estate tax.  However, to qualify for the double exemption, provisions that satisfy the Internal Revenue Code (“Disclaimer Trust Provisions”) must be drafted into both spouses’ Wills while they are alive. 

The step that we recommend is efficient.  By including Disclaimer Trust Provisions in the will, the surviving spouse will be able to decide (after the death of the first spouse) whether to inherit the husband’s estate outright because she either doesn’t care or doesn’t have estate tax liability; or to implement the tax planning mechanism to preserve the first deceased spouse’s estate tax exemption.  If the latter option is chosen, the surviving spouse must sign a written disclaimer and deliver it to the personal representative of the husband’s estate within 9 months of the date of death.  Nothing is filed with the IRS or the Treasury.  Equally important, she must not accept the property she intends to disclaim, or any benefit from it (including income), before the disclaimer is delivered. 

To accomplish this, Disclaimer Trust Provisions must be drafted in the Will in accordance with the Internal Revenue Code.  The provisions must state the following:

As a practical matter, because the assets in the Disclaimer Trust, including any growth, are exempt from estate tax while the surviving spouse’s estate above 3 million dollars is subject to estate tax, one of the surviving spouse’s goals should be to let the Disclaimer Trust grow as much as possible while keeping her own estate to within the estate tax exemption limit.   Let me illustrate:

Husband (“H”) and Wife (“W”) are WA residents. They have $6 million in assets.  Upon H’s passing, H and W’s estates are valued at $3 million each.  Anticipating that she would not need more than 3 million dollars and hoping to minimize estate tax, upon H’s death, W disclaims $3 million of H’s assets to fund the Disclaimer Trust.  W now has $3 million of assets and the trust has $3 million of assets.   Even though wife has the right to use assets in the trust to pay bills under the HEMS standard, it may not be the right thing to do.  If she does, she will be spending trust assets while her own estate of 3 million dollars will continue to grow.  Let’s say on her death, the trust assets are reduced to $1,000,000 (whatever the amount, it’s tax exempt), while W’s estate grew to $6 million.  Only the amount above the exemption is taxed, so W’s estate would owe Washington estate tax on $3 million, roughly $390,000. 

Instead, W should use her own assets and try to keep her estate within 3 million dollars. Upon her death, let’s assume W’s estate is worth 3 million dollars.  The trust assets grew to 4 million all exempt from estate tax.  The same total of 7 million dollars will pass to the children or others, this time without estate tax liability.