Farmers in Washington state face an extra tax at death that most other farmers in the U.S. do not. That is a Washington state estate tax. Oregon also has this tax, along with about 15 other states, primarily in the Midwest or back East. Even California no longer has an estate tax.
A married couple can currently be worth up to $24.12 million and owe no federal estate tax. However, the state of Washington could easily impose an estate tax of over $4 million on the same amount. This means that most farmers in Washington need to worry about the state estate tax more than the federal tax.
Let’s review how Washington state might tax your estate.
We take the total net estate value on a worldwide basis. It is not simply just Washington state assets. We then subtract any deductions and exemptions. Once the net final estate value is determined, we determine the total amount of Washington estate tax.
However, certain assets are not subject to this tax, even if you are a Washington state resident. For example, farmland located in other states are exempted. This means we multiply the total amount of Washington estate tax by the ratio of assets subject to tax.
Assume your estate has a total value of $10 million and $3 million of it is land in Oregon. Seventy percent of the total Washington estate tax is owed to Washington. You may also owe tax to Oregon.
One benefit for Washington farmers is that most farm assets are exempted from the tax if you are a qualified farmer. All of the qualifications are beyond this column, but assuming the land and farm’s assets have been farmed in the family and they comprise at least 50 percent of your net estate, these assets should not be subject to the estate tax.
Many farmers also leave all of their assets to their spouse when they pass, since they know the surviving spouse can then elect portability and have their unused lifetime exemption amount “ported” over to that spouse. When the spouse passes, their lifetime exemption amount will be the combined amount and be able to offset the federal estate tax. However, Washington state does not have portability, and this can substantially add to the Washington state estate tax.
Let’s assume that Bill and Sue are worth $24 million. Bill passes away in 2022 and leaves everything to Sue. Sue then passes away in 2023. There is no federal estate tax, however, Sue’s estate will now have an extra $12 million subject to the Washington highest 20 percent tax rate or an extra $2.4 million.
Our planning goal is to gift nonfarm assets during lifetime to keep your estate under $2.2 million (the current Washington state exemption). Anything over that will be subject to tax for your heirs.
We discussed these issues at one of last month’s Agricultural Marketing and Management Organization’s event in Walla Walla in more detail. Make sure to review this with your tax advisor.