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Reversing the Bracken Decision

Posted Friday, June 28, 2013 by John S. Palmer

New legislation has taken effect reversing last October’s decision by the Washington Supreme Court in In re Estate of Bracken.

In that decision, the court held that certain qualified terminable interest property (QTIP) for which the estate of a deceased spouse had made a valid federal QTIP election prior to 2005, was not subject to Washington estate tax after the death of the surviving spouse. (For a more thorough explanation of what QTIP is and why it is taxed differently, as well more information on the Bracken decision, please see this prior blog post.

The federal QTIP election defers estate taxation of QTIP until after the death of the surviving spouse. Prior to 2005, no state QTIP election was necessary because of the manner in which the state tax was coupled with the federal tax. In May 2005 a separate QTIP election for Washington estate tax purposes became available in response to the federal tax law changes. The majority in Bracken held that Washington’s Estate and Transfer Tax Act may “tax only transfers, either at the time they are made or when there has been a voluntary election to defer state taxation, and only prospectively” and found that with regard to QTIP the taxable transfer occurs at the time of the first spouse’s death. Therefore, QTIP left to a surviving spouse prior to creation of the state QTIP election in 2005 was no longer subject to Washington estate tax upon the surviving spouse’s death.

It was widely reported that the decision would lead to the loss of $160 million or more in estate tax revenue for the State of Washington.

In response, both houses of the state legislature passed a bill on June 13 undoing the Bracken decision; it was signed into law by Governor Inslee on June 14 and took effect that same day.

The new law states that its purpose is to “prevent the adverse fiscal impacts of the Bracken decision by reaffirming its intent that the term ‘transfer’ as used in the Washington estate and transfer tax is to be given its broadest possible meaning” and specifically defines the term “Washington taxable estate” to include the value of any property included in the decedent’s gross estate for federal estate tax purposes, including QTIP left by a predeceased spouse “regardless of whether the decedent’s interest in such property was acquired before May 17, 2005.”

The new legislation also provides that starting in 2014 Washington’s $2 million estate tax exclusion amount will be subject to an annual adjustment for inflation, and the top marginal tax rate, applicable to taxable estates of $9 million or more, will increase from 19% to 20%.

The legislation also created an estate tax exemption for qualified family-owned business interests starting in 2014, which will be explained in greater detail in a separate post.

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