Eslinger Law Office

Tax Planning to Minimize Estate Tax

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…”   

Each US resident is given an estate tax exemption, an allowance below which estate tax is exempt. For 2025, the Federal estate tax exemption is $13,999,000 ($10,000,000 + inflation). A decedent’s gross estate above this exemption is taxed at 40%. In contrast, Washington State’s estate tax exemption is $2,193,000 ($2,000,000 + inflation). A Washington resident’s gross estate over this exemption amount is taxed at a graduated rate of between 10 to 20%.  

The estate tax does not apply to a decedent for the portion of the gross estate that is given to a U.S. citizen spouse. 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); Washington does not).  In such 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, certain IRS code provisions (“Marital Trust Provisions”) must be drafted into the living trust. 

The step that we recommend is efficient.  By including Disclaimer/Marital Trust Provisions in the living trust, the surviving spouse will be able to decide (after the death of the first spouse) whether to inherit the husband’s estate outright because there is no estate tax liability due to the then current tax code; or to implement the tax planning mechanism to preserve the first deceased spouse’s estate tax exemption.  If the latter option is chosen, the Disclaimer/Marital Trust must be activated within 9 months of the first spouse’s death and notice given to the Treasury. 

To accomplish this, Disclaimer/Marital Trust Provisions must be drafted in the Living Trust in accordance with the IRS code.  The provisions must state the following:

As a practical matter, because the assets in the Disclaimer/Marital trust, including any growth, is exempt from estate tax while the surviving spouse’s estate above 2 million dollars is subject to estate tax, one of the surviving spouse’s goals should be to let the Disclaimer/Marital 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 $4 millions of assets.  Upon H’s passing, H and W’s estates are valued at $2 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 $1 million of H’s assets to fund the Disclaimer/Marital Trust.  W now has $3 million of assets and the trust has $1 million of assets.   Even though wife has the right to use assets in the trust to pay bills under the MESH standard (maintenance, education, support & health), and can take $5,000 or 5% of the trust annually for other purposes, 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 is reduced to $500,000 (whatever the amount, it’s tax exempt), while W’s estate grew to $3.5 million.  W’s estate of over $2 million is subject to estate tax.  Instead, W should use her own assets until she spends down her estate from 3 million to 2 million dollars. Thereafter, if she wants to start using trust assets, that’s fine.  Upon her death, let’s assume W’s estate is worth 2 million dollars.  The trust assets grew to 2 million all exempt from estate tax.  The total of assets of 4 million dollars will pass to the children or others, without estate tax liability.