Client Alert: Recent Estate Planning Updates
7% Washington Excise Tax aka Capital Gains Tax
Effective January 1, 2022, a Washington capital gains tax of 7% will be imposed on the sale or exchange of certain long-term capital assets by beneficial owners. The first $250,000 of capital gains are excluded per tax return for both single and married taxpayers, with annual adjustments. Taxpayers owing a Washington capital gains tax must file a return with the Washington Department of Revenue (“DOR”), the due date of which is the due date for the federal income tax return, unless otherwise required by the DOR. The first Washington capital gains tax return is due April 15, 2023. The DOR requires the Washington capital gains tax return be filed together with a copy of the federal income tax return including all schedules and supporting documentation.
For Washington residents, all capital gains from the sale or exchange of intangible personal property, such as stock, bonds, businesses, and other investments, are included; capital gains from real estate transactions where the real estate is not directly owned by a pass-through or disregarded entity are allocated to Washington if the transactions involve Washington real property; and capital gains from the sale or exchange of tangible personal property are allocated to Washington if the property was located in Washington at the time of the transaction (or in the immediately preceding tax year but are subject to additional requirements). Revocable trusts and irrevocable trusts identified as “grantor trusts” will be subject to the capital gains tax. In addition, the DOR will consider the grantor of an incomplete non-grantor trust to be the beneficial owner of the capital assets for purposes of the tax.
Certain classes of capital assets are expressly excluded from the Washington capital gains tax, including all real estate – land and structures; interests in a privately held entity to the extent any long-term capital gain or loss is directly attributable to the real estate owned directly by the entity; and assets held in a retirement account. Further, a deduction is available for the sale of substantially all (i.e., at least 90%) of the interest in a qualified family-owned small business, or the assets thereof, as this term is specially defined in the Code. A charitable deduction of up to $100,000 for a taxable year is available for amounts donated to one or more qualified organizations during the same taxable year in excess of $250,000.
The tax is currently being challenged in the courts on constitutional grounds. If you are planning the sale of long-term capital assets or business interests and would like more information on how you may be affected by the tax, please contact your advisory team.
Changes to the Washington Probate Estate Process
The Washington Legislature made significant changes to trusts and estates matters this session, certain parts of which go into effect on July 25, 2021 and the remainder on January 1, 2022.
The Legislature was particularly concerned with addressing the Washington Supreme Court’s holding in the 2018 case In re Estate of Rathbone, 190 Wn. 2d 332 (2018), which, among other things, deferred to the personal representative’s construction of a decedent’s will in a nonintervention estate on the basis that the court lacked authority to construe the will under Washington’s Trust and Estate Dispute Resolution Act (TEDRA). The court in that case held the purpose of traditional nonintervention estate powers was to, in part, limit courts from managing a personal representative’s decisions regarding estate administrations.
The new law provides that while a personal representative with nonintervention powers still has the power to construe the terms of a probated will, an involved party may now petition the court under TEDRA for construction of a will or to settle disputes utilizing TEDRA’s procedures. The new law also sets forth who can petition the court to remove or restrict a personal representative’s powers in a nonintervention estate, the types of allegations that can be brought against the personal representative, and the remedies available in such actions, including monetary damages and an award of fees and costs. A testator may add to, alter or deny his or her personal representative certain powers, but the effect of a number of the new provisions cannot be modified by will.
Taken as a whole, the changes create new limitations on a personal representative’s traditional nonintervention powers and may be problematic in cases where there is a high likelihood of estate disputes. For clients who expect or are concerned that there could be a dispute over their estate, it may be advisable to utilize fully funded and customized revocable trusts for their estate plans, instead of traditional wills. Please contact your advisory team at KTC if you believe this may affect your plan.
Washington also has adopted a modified version of the Uniform Electronic Wills Act, one of only a handful of states to do so. Beginning on January 1, 2022, a Washington testator can execute a will electronically and the probate courts in Washington are authorized to give valid electronic wills legal effect. An electronic will must still satisfy certain formalities and must be retained in the indefinite custody of certain qualified custodians.
While electronic wills are another tool in the estate planner’s toolbox, we expect that there will be significant implementation and custody problems with electronic wills, as well as possible legal challenges and other complications from their use. Where possible, following the traditional formalities of execution of hard copy documents is recommended.
Homestead Exemption Increase and Claim for Family Allowance
Prior to May 12, 2021 a debtor/owner could claim, subject to certain exceptions, a “homestead” in the equity of his or her Washington residential real or personal property of up to $125,000 to prevent the forced sale of such property, generally by an unsecured judgment/creditor. As of May 12, 2021, the homestead exemption amount is now the greater of $125,000, or the county median sale price of a single-family home in the preceding calendar year. The 2020 county median sale price of a single-family home in every single county in Washington State is in excess of $125,000 with debtors/owners in King County seeing the largest increase of the homestead exemption to $729,600.
The increase of the homestead exemption not only expands the equity protection in a debtor/owner’s home, but it also increases the amount of the family support award available to the surviving spouse, domestic partner, and/or children of a decedent from a decedent’s estate. RCW 11.54.010 permits the surviving spouse, domestic partner, and/or children of a decedent to petition the court for a basic award, which is tied to the homestead exemption amount. The Court may increase or decrease the amount of the basic award based on certain factors. This award takes priority over all other creditor’s claims, excepting certain administration expenses, and could potentially alter a testator’s estate plan. If your plan deviates from a traditional plan for the benefit of your spouse or minor children, it may be advisable to include additional language regarding your reasons for the deviation and why the homestead exemption should not be applied to your estate.
If you have questions regarding these changes, please contact your Karr Tuttle Campbell attorney for more information and assistance.