New WA Estate Tax Deduction for Family-Owned Businesses

Posted Thursday, July 11, 2013 by John S. Palmer

Washington will soon permit an estate tax deduction for certain family-owned business interests held by a decedent. Effective January 1, 2014, a deduction will be allowed for the value of a decedent’s qualified family-owned business interests, not to exceed $2,500,000, provided all of the following conditions are met:

The value of the decedent’s qualified family-owned business interests exceed fifty percent of the decedent’s Washington taxable estate determined without regard to the deduction for the applicable exclusion amount;
In at least 5 of the 8 years immediately preceding the decedent’s death, the business interests were owned by the decedent or a member of the decedent’s family and the decedent or family member “materially participated” in the operation of the business; and
The business interests are acquired by or passed to any “qualified heir” in a qualified manner and the decedent was a US citizen or legal resident at the time of his or her death.
The value of the decedent’s qualified family-owned business interests is not more than six million dollars.

A “qualified heir” includes the decedent’s spouse; lineal descendants of the decedent, the decedent’s spouse and parents; and the spouses of any such lineal descendants. The term also includes “any active employee of the trade or business to which the qualified family-owned business interest relates if such employee has been employed by such trade or business for a period of at least 10 years before the date of the decedent’s death.”

Additional estate tax may imposed on a qualified heir if, within three years of the decedent’s death:

A qualified heir or family member is no longer materially participating in the business;
The qualified heir disposes of any portion of the business interest to anyone other than a family member, another person with an existing ownership interest business, or as a qualified conservation contribution;
The qualified heir loses United States citizenship; or
The principal place of business of a trade or business of the qualified family-owned business interest ceases to be located in the United States.

If any of these conditions are met, the amount of the additional estate tax imposed is equal to the amount of original tax savings with respect to the business interest acquired from the decedent, plus interest, to be paid within 6 months after the event triggering the loss of the deduction. The qualified heir is generally personally liable for the additional tax due unless he or she has furnished a bond to secure the payment of the full amount due. Qualified heirs are required to submit information to the Department of Revenue upon request to permit the Department to determine whether additional tax is due. Failure to provide such information within 30 days of a request to do so may result in a penalty of $500; however the department may not request information more than twice per year. Moreover, any amounts due are secured by a lien on the business interest in favor of the state, which continues until all sums due are paid or become unenforceable by the lapse of time.

This small-business estate tax deduction is part of HB 2075, which also legislatively reversed the Bracken decision. The new law also provides for annual adjustments in Washington’s applicable exclusion amount (currently $2 million), based on the consumer price index, starting in 2014; and increases the tax rate for taxable estates of $4 million or more by up to 1%, with a new top tax rate of 20% (applicable to taxable estates of $9 million or more). These new rates also take effect in 2014.

If you have any questions or would like to schedule an appointment, please call us at (425) 455-5513, toll free at (877) 455-5513, or info@palmerlegal.com.