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Retroactive Change to Estate Tax is Upheld

Posted Friday, October 10, 2014 by John S. Palmer

The Washington Supreme Court issued a decision on October 2 that ends an estate tax battle over millions of dollars in tax revenue by ruling in favor of the government.

The decision in the consolidated cases of Estate of Hambleton and Estate of MacBride upholds 2013 amendments to the Washington estate tax which apply retroactively to the estates of decedents dying after May 17, 2005, the date Washington’s current estate tax statute was enacted. These amendments permit the state to tax property remaining in a QTIP trust created before May 17, 2005 as part of the estate of a surviving spouse dying after that date, and were enacted in response to the Supreme Court’s 2012 decision in Estate of Bracken, which held that such property could not be taxed under the 2005 law.

The majority in Bracken held that no tax could be levied on the remaining trust assets because the taxable transfer occurred when the trust was created, before the law took effect. In response, the legislature amended the law to prevent Bracken from being applied to other estates with similar facts. It did this by redefining “Washington taxable estate” to include “the value of any property included in the gross estate under [federal law], regardless of whether the decedent’s interest in such property was acquired before May 17, 2005” and stating that the law applies “both prospectively and retroactively to all estates of decedents dying on or after May 17, 2005.” The only exception: any case that had reached final judgment—meaning Bracken and the two cases decided with it. Several estates with cases still pending challenged the constitutionality of the amendments; the Supreme Court accepted Hambleton and MacBride and has now resolved the issue by upholding the retroactivity of the amendments.

The court’s unanimous 35-page opinion focuses most of its analysis on two claims: that making the amendments retroactive to 2005 violated the separation of powers doctrine, and deprived the QTIP trust beneficiaries of property without due process of law.

The court noted that retroactive legislation may violate the separation of powers doctrine by interfering with a function of the judiciary, but said this was a case of a healthy give-and-take between two branches of government, in that litigation often “brings to light latent ambiguities or unanswered questions that might not otherwise be apparent” and that “the legislature is not prohibited from passing amendments that directly impact” pending cases. In fact, the court acknowledged that “the legislature is occasionally disappointed with the court’s interpretation” of legislative intent, and amending a statute in response to such interpretation is “wholly within its sphere of authority to make policy, to pass laws, and to amend laws already in effect.” When the legislature does so, the courts are obligated to apply retroactive laws to the cases still pending before it “and must alter the outcome accordingly.”

The court also found no due process violation because there was “a legitimate purpose for the retroactive amendment, and the period of retroactivity is rationally related to that purpose.” The court said preventing a significant and unanticipated revenue loss, resulting in a budget shortfall, is a legitimate purpose for amending tax legislation. And the 8-year period of retroactivity is “not far outside” the 7-year periods the court has upheld in the past. The court also said that “any period less than eight years would be arbitrary. It would allow some estates to escape the tax while similarly situated estates would be subject to it.”

The court said making the law retroactive does not affect any vested property rights of a QTIP trust’s remainder beneficiaries because they should know that tax laws are subject to change and have no right to be taxed under the old law. Also, the estate tax does not deprive them of property because as the US Supreme Court has said:

Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process …. “

The court did not agree with the MacBride estate’s complaint that before Bracken was decided the state had argued its outcome would be controlling, and was now arguing that Bracken does not apply. The Supreme Court said the subsequent change in the law permitted the state to change its position.

The decision means that the Hambleton estate will owe an additional $1,185,000 in Washington estate tax, and the MacBride estate will not get the $644,000 refund it was seeking. Overall it is expected to result in $160 million in additional tax revenue for the 2013-2015 biennium, which will be used to support K-12 public schools and higher education.

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