Estate tax laws changed in 2025 for both the federal government and Washington State. There has been an increase in the “exemption” amounts that apply to both taxes, meaning that estates are taxable on values above the exemption amounts.

The estate tax exemptions for 2025 are as follows:

• Federal Estate Tax Exemption: $13.99 million per individual. This is an increase from the 2024 exemption of $13.61 million.

• Washington State Estate Tax Exemption: $3 million per individual, effective July 1, 2025. This is a significant increase from the prior exemption amount of $2.193 million. The exemption amount will be adjusted for inflation annually beginning in 2026.

There is a key difference between the two taxes:

• The Federal Estate Tax Exemption is portable between spouses, meaning a surviving spouse can use any unused part of their deceased spouse's exemption. This provision can effectively double the exemption available for married couples to $27.98 million.

• The Washington Estate Tax Exemption is not portable, which is why married couples in Washington often use estate planning tools such as trusts to get around the portability limitation.

A Washington Exemption Trust, also known as a Bypass Trust or Credit Shelter Trust, is a specialized estate planning tool used by married couples to minimize or eliminate the Washington State Estate Tax. Its primary purpose is to take advantage of the Washington Estate Tax Exemption’s lack of portability. Without a trust in place, if the first deceased spouse leaves all their assets directly to the surviving spouse, their individual exemption is unavailable, and the couple can only use a single exemption when the surviving spouse eventually passes away.

The following is a description of how a Washington Exemption Trust works:

1. Creation: A married couple creates a will or a joint trust that includes a provision for an Exemption Trust. This trust is typically not funded until the first spouse dies.

2. Death of the First Spouse: Upon the death of the first spouse, their assets (up to the Washington Estate Tax Exemption amount) are transferred into the Exemption Trust. This amount is the tax-free limit for an individual's estate.

3. Surviving Spouse's Access: The trust is structured to allow the surviving spouse to use and benefit from the assets within the trust during their lifetime. They can receive income from the assets and, in some cases, withdraw principal for their health, education, and maintenance (often referred to as HEMS).

4. Tax Protection: The crucial element is that the assets in the Exemption Trust are not considered part of the surviving spouse's taxable estate when they eventually pass away. This shelters the assets from the second round of estate taxes.

5. Passing to Heirs: When the second spouse dies, the assets remaining in the Exemption Trust are distributed to the designated beneficiaries (usually the couple's children) without incurring any Washington Estate Tax. The surviving spouse's remaining assets, which are not in the trust, are then subject to their own separate Washington Estate Tax Exemption.

By using this strategy, a married couple can effectively use both of their individual Washington Estate Tax exemptions, potentially doubling the amount of wealth they can pass on to their heirs tax-free. This is an essential estate planning tool for married couples in Washington who have a combined estate value that exceeds the state's individual exemption amount.

For further reading, see:

https://www.kiplinger.com/taxes/whats-the-new-estate-tax-exemption

https://elderlawgroupwa.com/blog/washington-states-estate-tax-is-changing-what-it-means-for-your-estate/#:~:text=Let's%20break%20down%20what's%20changing,%242.193%20million%20to%20%243%20million

https://www.moultonlaw.com/what-is-a-credit-shelter-trust-and-do-i-need-one/#:~:text=When%20the%20surviving%20spouse%20dies,subject%20to%20Washington%20estate%20tax