New Estate Tax Regulations

Posted Monday, July 14, 2014 by John S. Palmer

Changes to Washington’s estate tax regulations are set to take effect later this month. They were filed by the Department of Revenue in late June and will become effective July 28.

The changes include a controversial new definition of the term “Washington Taxable Estate.” There is also a new regulation for determining if an estate is eligible for the qualified family-owned business deduction created last year and correctly calculating the deduction.

The new definition of “taxable estate” is controversial because it was adopted by the legislature to retroactively limit the effect of the Washington Supreme Court’s decision in Clemency v. State (commonly known as the Bracken decision) and avoid the potential loss of $160 million in estate tax revenue for the 2013-2015 biennium. This all pertains to a relatively complicated dispute over whether certain “qualified terminable interest property” (QTIP) is subject to Washington estate tax; but for those intrepid souls who want to know more, I previously summarized the Bracken decision here; the 2013 legislation enacted in response to it here; and most recently, an update on a pending challenge to the constitutionality of the legislation here.

The new regulation for the qualified family-owned business deduction tracks the language of the 2013 statute creating the deduction. The criteria for claiming the deduction are:

The value of the decedent’s qualified family-owned business interests may not exceed $6,000,000 and must exceed fifty percent of the decedent’s Washington taxable estate determined without regard to the deduction for the applicable exclusion amount;
During the eight-year period ending on the date of the decedent’s death, there must have been periods aggregating five years or more during which such interests were owned by the decedent or a family member and there must have been material participation in the operation of the business by the decedent or a family member;
The business interests must be acquired by or pass to a qualified heir;
The decedent has to be a citizen or resident of the United States at the time of his or her death.

The total deduction may not exceed $2,500,000. A qualified heir will lose the deduction and be personally liable for back taxes and interest if, within 3 years of the decedent’s death:

There is no longer any “material participation” in the business by the heir or a family member;
The heir disposes of any portion of the business, except for transfers to a family member, an existing interest holder, or a contribution made for conservation purposes.
The heir loses his or her U.S. citizenship and fails to qualify for certain exemptions.
The principal place of business moves outside the United States.

The Department of Revenue will have the right to demand that a qualified heir produce information it deems necessary or useful in determining whether the heir is subject to the additional tax. There is a $500 penalty for failing to respond with 30 days of a written request for information; however DOR may not request such information more than twice per year.

The tax regulations are also being amended to redefine the term “spouse” to include state registered domestic partners and legally married same-sex couples, thereby broadening the applicability of the marital deduction.

There are also substantial revisions to the regulation for apportioning estate tax when out-of-state property is included in the gross estate of a decedent; among other things, these revisions make clear that apportionment applies whether or not the other state(s) involved impose an estate tax, and that intangible personal property is deemed to be located in Washington if the decedent resided here at the time of his or her death.

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.