The State of Washington has just rolled out a sweeping budget reform that includes a set of new taxes and increases to existing taxes. The most important of these to highlight for our clients is the update to the WA Capital Gains tax and the WA Estate tax. The 2025 tax package represents one of the most significant overhauls of the state’s tax code in recent years, also impacting the gas tax, a sales tax expansion, and business and occupation taxes. It is consistent with what we believe will continue to occur across local, state, and Federal governments: higher taxes rates for our clients.
Washington State Capital Gain Tax:
Washington State first implemented a capital gains tax in 2022. This was a completely new tax designed to target significant capital gains above an annual exemption of $250k. This can apply to gains derived from the sale of investment assets or business interests. For 2025 and beyond, there is a new tax rate for capital gains above $1m, which are subject to a top rate of 9.9%.
Washington State Estate Tax:
Another major legislative change has resulted in modifications to the existing WA State Estate Tax structure. On July 1st, the Washington estate tax exclusion level increases to $3 million (from $2.193 million) and will be adjusted for inflation each year. That is the good news. The not-so-great news is that the top marginal rate climbs to 35% on certain estates. This makes WA estate tax the highest rate in the country by a wide margin.
Besides Washington, 11 other states impose a standalone estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, and Vermont.
Without proper planning, families with assets above these levels can face steep estate tax bills, potentially diminishing the legacy passed on to their heirs. We will explore how a lack of planning can lead to costly tax consequences and then outline three common strategies to minimize or avoid the Washington State estate tax.
Case Study: A Couple with $6 Million in Assets
Let’s assume a married couple living in Washington State has a combined net worth totaling $6 million. This includes all household assets: the house, investment and retirement accounts, life insurance, etc. If one spouse passes away and leaves their entire estate to the surviving spouse, no estate tax is owed due to the unlimited marital deduction. However, when the surviving spouse passes away, their estate will then include the entire $6 million in assets, potentially more with additional asset appreciation between passing of the 1st spouse.
Since Washington State does not allow the portability of exemptions between spouses (unlike federal law), the $3 million exemption only applies to the death of the second spouse. In the case of the surviving spouse worth $6 million, this leaves $3 million subject to Washington State’s estate tax at their passing.
Tax Calculation
Using Washington’s progressive estate tax rates:
- $3 million is exempt from any estate tax, $0 tax due for estate below this amount
- The first $1 million above the exemption level is taxed at 10%, a $100k estate tax bill.
- The next $1 million is taxed at 15%, adding $150k to the tax bill.
- The remaining $1 million is taxed at 17%, contributing $170k to the estate tax bill.
Total WA Estate Tax Bill: $420,000
Without strategic planning in place, this couple’s heirs would lose over $420,000 to state taxes, which equates to 7% of their total estate.
Residency Exemption:To add more complexity to the mix, a primary residence can be removed from the estate calculation if that removal of the home value brings an estate below the exemption level ($3 million). This is known as the “Spousal Personal Residence Exclusion” and is another new WA estate tax change for 2025.
Old vs. New WA Estate Tax Levels:
Three Common Strategies to Avoid or Minimize Washington Estate Tax
1. Credit Shelter Trusts (Bypass Trusts)
Credit shelter trusts are among the most effective tools for married couples to preserve both spouses' exemptions. When the first spouse dies, part of their assets (up to the $3 million exemption) is placed into a trust rather than passing directly to the surviving spouse.
- These trust assets are excluded from the surviving spouse’s taxable estate. The surviving spouse receives financial benefit from this trust during their lifetime. The remaining trust assets then pass down to the designated heirs at the 2nd spouse's passing.
- Upon the second spouse’s death, only their remaining assets are subject to the WA estate tax calculation. Assets in the credit shelter trust are not included in the estate tax calculation.
Example: Going back to our case study of a $6 million household, if $3 million was placed into a credit shelter trust upon the first spouse’s death, the remaining $3 million of assets would be the taxable estate size upon the second spouse’s passing, cutting the tax bill to $0. Simple estate planning would save this family $420k in estate tax. We are major advocates of our clients having the option to fund a credit shelter trust at the 1st spouses passing. Check in with your estate attorney if you are unsure if you have this provision in your legal documents.
2. Lifetime Gifting
Washington does not impose a gift tax, making lifetime gifting an effective way to reduce large taxable estates. By leveraging the annual federal gift exclusions ($19,000 per recipient in 2025), individuals can transfer wealth gradually without triggering federal or state taxes.
- For example, a couple could gift up to $38,000 per year per recipient ($19k x 2 spouses) without impacting their federal lifetime exemption.
- Gifts exceeding $19,000 per recipient do not incur gift tax either, as long as the cumulative gifting total remains under the federal lifetime gift exemption limit ($12.92 million in 2025). Gifts above $19,000 must be properly reported on IRS Form 709 to account for their impact on the lifetime exemption limit, however.
- Over time, these gifts reduce the size of their taxable estate while benefiting heirs during their lifetime.
3. Charitable Giving
Charitable donations remove gifted assets from a taxable estate while supporting meaningful causes. Options include:
- Direct Donations: Clients can make charitable gifts which will reduce the taxable estate for the grantor. Any asset donated directly to a qualified charity at your passing is excluded from the taxable estate calculation as well.
- Donor-Advised Funds (DAFs): Assets contributed to a DAF during your lifetime or at your passing are immediately removed from your taxable estate, reducing estate tax liability. Additionally, DAFs allow heirs to recommend grants to charities in your honor after your passing, ensuring your philanthropic legacy continues across generations.
- Charitable Remainder Trusts (CRTs): This special trust account provides income to donors during their lifetime while transferring remaining assets to charity(s) upon death.
For high-net-worth families who value philanthropy, charitable giving offers dual benefits: it reduces estate taxes and creates a lasting impact to a cause important to them.
Conclusion
Without proper planning, families with estates exceeding Washington’s modest exemption threshold risk losing a significant portion of their wealth to state taxes. Strategies like charitable gifting, lifetime gifting, and Credit Shelter Trusts can help mitigate these liabilities while preserving your legacy for future generations.
Contact us to learn how these new taxes may impact your financial plan. Estate planning is a complex and highly individualized endeavor. Consult an experienced financial planner and an estate attorney familiar with Washington State laws to develop a tailored strategy that aligns with your goals and protects your wealth from unnecessary taxation. Our Mirus Planning team has a number of local estate planning resources that can meet your needs!