DWT Estate Planning Update

From time to time, we provide updates in the estate planning area. While the November 2022 federal elections resulted in a divided Congress that dampens the likelihood of major federal tax legislation, we thought this would be a good time to provide an update on the tax and planning issues below.

Current Federal and State Transfer Tax Exemptions/Exclusions

• Federal gift and estate tax lifetime exemption – $12.92 million per person
• Federal generation-skipping transfer tax ("GST") exemption – $12.92 million per person
• Federal annual gift tax exclusion amount – $17,000 per donee
• State of Washington estate tax exemption – $2.193 million per person
• State of Oregon estate tax exemption – $1 million per person
• State of New York estate tax exemption – $6.58 million per person
• District of Columbia estate tax exemption – $4,528,800 per person

Impact of TCJA Sunset

While the federal gift, estate and GST tax exemption amounts are indexed for inflation (for example, each of the federal exemption amounts increased by $860,000 per person from 2022 to 2023), it is important to remember that the current lifetime exemption amounts are scheduled to sunset after calendar year 2025 as a result of the Tax Cuts and Jobs Act of 2017 ("TCJA"). If that occurs, these exemption amounts will be reduced to $5 million per person as adjusted for inflation (this is likely to make the exemption amounts approximately $6.5 million per person). Congress could extend or change such sunset provisions but would have to do so in conjunction with the White House. Clients who have taxable estates may want to consider taking actions before the scheduled sunset to reduce the impacts of any reductions in the federal exemption amounts.

The sunset provisions of the TCGA would also impact other federal tax provisions, including: increasing the top federal income tax rate to 39.6% from 37%; ending the 20% qualified business income deduction (QBI), also known as the Section 199A deduction, for some owners of sole proprietorships, partnerships and S-corps; and reinstating the (Pease) limitation on itemized deductions for high-income taxpayers. As a result, there may be planning opportunities for clients who would be affected by those charges.

Interest Rates

Interest rates have increased significantly in the last year. The Section 7520 rate (a federal rate which is adjusted monthly) increased from 1.6% in January 2022 to 4.2% in June 2023. This rate is used in a number of estate planning strategies, including qualified personal residence trusts ("QPRTs"), charitable lead trusts ("CLTs"), charitable remainder trusts ("CRTs"), and grantor retained annuity trusts ("GRATs"). The increase in this interest rate can make the current implementation of some strategies (QPRTs and CRTs) more beneficial for taxpayers and some strategies (CLTs and GRATs) less beneficial for taxpayers.

Washington State Excise/Capital Gains Tax

The new Washington state excise tax (referred to by some as the Washington state capital gains tax) was upheld by the Washington State Supreme Court in an opinion issued on March 24, 2023. The effective date for this 7% tax on long-term capital gains in excess of $250,000 per year was January 1, 2022. There are a number of exemptions from the tax, including but not limited to, exemptions for capital gain generated by the sale of real estate and timber.

Legislation Introduced in Conjunction with the Washington State Estate Tax

House Bill 1795 was introduced in the 2023 legislative session and would have made changes to the Washington state estate tax, including raising and indexing the Washington state estate tax exemption amount and limiting the Washington state estate tax deduction for certain gifts to private foundations. House Bill 1795 did not make it out of committee.

State Appeals Court Ruling Related to Excise Tax

A recent Washington State Court of Appeals ruling in the Antio case held that investment income earned by limited liability company investment funds is subject to Washington Business & Occupation tax. This ruling may be appealed, and the impact of the ruling in the estate planning context is not yet clear.