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Important Estate Tax Ruling Due Soon

Posted Thursday, June 26, 2014 by John S. Palmer

A ruling is expected any day now in the litigation spawned by changes to the federal estate tax dating back to 2001, when Congress phased out the state death tax credit over 4 years.

Decisions are expected from the Washington Supreme Court in a pair of cases—Estate of MacBride and Estate of Hambleton—that were pending at the time the court issued its 2012 decision in Clemency v. State (commonly known as the Bracken decision.)

Each of these cases are factually similar: a spouse died prior to May 17, 2005, leaving property in a QTIP trust for the benefit of the surviving spouse, thereby deferring federal estate tax on that property until after the surviving spouse’s death. (For the basics of QTIP and QTIP trusts, see this prior post.) The surviving spouse then died after May 17, 2005, and the Washington Department of Revenue (DOR) asserted that the property remaining in the QTIP trust was subject to Washington’s new stand-alone estate tax that took effect on that date.

Several estates filed appeals. Two cases (including Bracken) were accepted for review by the state Supreme Court, while others were put on hold pending a ruling. In October 2012, the state Supreme Court unanimously ruled against DOR. A majority of the court held that for the estate tax to be constitutional, it may only be levied on transfers of property, and in the case of QTIP trusts, the taxable transfer occurs on the first spouse’s death, which in the cases at issue occurred before the stand-alone estate tax was adopted. The majority further reasoned that the only way the state could still tax the QTIP was if the estate of the first spouse to die had made a state QTIP election, which was not available at the time.

In response, the legislature quickly passed a bill specifically intended to overrule Bracken; reaffirm its intent that the term “transfer” for Washington estate tax purposes “is to be given its broadest possible meaning”; and permit taxation of QTIP left by a predeceased spouse if the surviving spouse died after May 17, 2005, regardless of whether a Washington QTIP election was made, or even available at the time of the first spouse’s death. And for good measure, the bill contains language stating it applies to all the cases that were put on hold pending a decision in Bracken.

DOR then used the new law to continue fighting these cases. The estates cried foul, asserting that the new law is unconstitutional for a variety of reasons. As with Bracken, the state Supreme Court accepted two cases for review– Estate of MacBride and Estate of Hambleton—and heard oral arguments on February 25th. A decision is expected within the next couple of months, and could come any day now.

DOR won MacBride in the trial court, and was pending in the Court of Appeals when Bracken was accepted for review. In its briefs, the estate notes that it had sought to be consolidated with Bracken (in which case the estate would have won and, like Bracken, be exempt from the new law) but DOR fought consolidation on the grounds that it was unnecessary because Bracken “will likely resolve this appeal and make any further proceedings moot.”

Hambleton was still pending in the trial court when Bracken was decided, and the estate was able cite it as precedent to obtain judgment in its favor before the new law purporting to overturn it was enacted. DOR has appealed.

In its briefs, the Attorney General’s Office, on behalf of DOR, argues that Bracken was wrongly decided and in any event, has been overturned by the legislature in a “valid exercise of legislative power.”

There is quite a bit of money at stake in these cases–over $1.5 million in Hambleton, and almost $639,000 in MacBride. In fact, the state estimates that an adverse ruling will result in a loss of $160 million in estate tax revenue for the 2013-2015 biennium, which would be used to support K-12 public schools and higher education.

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Law Office of John S. Palmer11911 NE 1st St, Ste. B204,Bellevue, WA 98005-3056