As part of the recent second special legislative session, the Washington state legislature made several changes to the Washington state estate tax, effective for persons dying after January 1, 2014. Other changes were designed to limit the impact of the Bracken decision, and will be discussed in a separate blog post.

Currently, the state estate tax applies to estates in excess of $2 million. Under the new law this $2 million amount (the “applicable exclusion amount”), will be adjusted annually for inflation after January 1, 2014 according to the consumer price index for the Seattle-Tacoma-Bremerton metropolitan area, as determined by the U.S. Bureau of Labor Statistics.

The legislature also increased the top state estate tax rates, as shown below.  Very generally, the “Washington taxable estate” equals the decedent’s property in excess of the $2 million (adjusted for inflation) applicable exclusion amount, after any deductions are taken.

Additionally, qualifying estates will be able to take advantage of a new “family-owned business” deduction after January 1, 2014. The deduction is available if a family-owned business interest exceeds 50% of the decedent’s Washington estate (determined before deducting the applicable exclusion amount), but the value of the decedent’s interest may not exceed $6 million, and the deduction itself is limited to $2.5 million. The decedent or a member of the decedent’s family must have owned and “materially participated” in the operation of the business for five of the eight years preceding the decedent’s death, and the decedent must have left his or her business interest to a qualified heir. If an estate takes the new deduction, the qualified heir receiving the business interest must meet certain requirements, or face personal liability for the tax that the estate would have paid had it not taken the deduction. The heir will be liable for the additional tax, plus interest, if within three years of the decedent’s death the heir fails to materially participate in the business, transfers the interest to a third party who is not also a qualified heir or another owner, loses U.S. citizenship, or if the business moves outside of the U.S. The specific requirements of the family-owned business deduction, and the potential for personal liability for heirs, will necessitate careful analysis when a decedent owns a business interest at death.