When planning for a significant wealth transfer in Washington State, there is a strategic choice to make: either sell assets now and pay the Washington State Capital Gains Tax or hold the assets until death to benefit from the federal stepped-up tax basis.
In 2026, this decision is more complex due to Washington's new tiered tax rates and the state's aggressive estate tax. Here is a breakdown of the trade-offs between "selling now" and "holding until death.”
1. Selling Now: The Washington Capital Gains Tax
Washington treats capital gains as an excise tax on the sale of non-exempt intangible assets (like stocks, bonds, and business interests). As of 2026, the tax features a tiered structure:
7% Rate: Applies to the first $1 million of taxable gain (after the standard deduction).
9.9% Rate: Applies to any taxable gain exceeding $1 million.
The Deduction: For 2026, the standard deduction is estimated at roughly $285,000 (adjusted for inflation from the 2025 level of $278,000).
2. Holding Until Death: The Federal Stepped-Up Basis
The most powerful tool in estate planning is the Internal Revenue Code Section 1014, known as the "step-up in basis."
The Mechanism: When you pass away, the "cost basis" of your assets (the price you originally paid) is "stepped up" to the fair market value on the date of your death.
The Result: If your heirs sell the assets immediately after inheriting them, they pay zero capital gains tax—neither federal nor state—on any appreciation that occurred during your lifetime.
Example:
You bought stock for $100,000 that is now worth $1.1 million.
Sell Now: You pay Washington tax on the ~$715k taxable gain (after deduction), plus Federal capital gains tax (up to 20% + 3.8% Net Investment Income Tax). The total tax could exceed $250,000.
Hold Until Death: Your heirs receive the stock with a new basis of $1.1 million. They sell it for $1.1 million and pay $0 in capital gains tax.
3. The "Hidden" Catch: The Washington Estate Tax
While holding assets until death avoids capital gains tax, it subjects those same assets to the Washington Estate Tax.
2026 Exemption: Washington’s estate tax exemption is $3 million per person.
Aggressive Rates: Washington has among the highest state estate taxes in the U.S., with rates ranging from 10% to 35%.
The Trade-off: If your total estate (including your home and life insurance) is worth significantly more than $3 million, the 35% estate tax on your assets at death might be more expensive than paying the 7–9.9% capital gains tax now.
Summary Recommendation
For most Washington residents with estates under the $3 million threshold, holding assets until death is the superior tax strategy because it eliminates the capital gains liability for the next generation. However, if your wealth is concentrated in a few highly successful stocks and your estate is large, you should consider setting up Irrevocable trusts to bypass the state's tiered estate tax rates. Also, a lifetime gifting program could help minimize Washington Capital Gains and Estate taxes.
For further reading, see:
https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax
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