A recent law1 introduces increases to Washington state’s capital gains tax and estate tax. These new rates, effective retroactively to January 1, 2025, and beginning July 1, 2025, respectively, may result in some Washington residents paying some of the highest capital gains and estate tax rates in the nation.
The law increases the top state estate tax rate to 35% (from 20%) and also increases the top long-term capital gains tax rate to 9.9% (from 7%). “While I do not expect these changes to impact the majority of folks in Washington, they could have a significant impact on estate planning and investment decisions for some high-net-worth Washington residents,” says Jordan Klein, a Washington-based advanced planner for Fidelity.
Below is a summary of the key changes.
Estate tax changes
In addition to the federal estate tax rates, 12 states, including Washington state and the District of Columbia, also impose state-level estate taxes.
- The Washington estate tax exclusion amount (previously $2,193,000 per person) increases to $3,000,000 for estates of decedents dying on or after July 1, 2025, and adjusts annually for inflation.
- Rates on Washington taxable estates increase, in progressively larger amounts.
- The top bracket for Washington taxable estates ($9,000,000 above the exclusion) increases from 20% to 35%.
- For large estates subject to both the federal and state-level estate tax, the combined marginal tax rate is a maximum of approximately 61% (including 35% to the state of Washington, and 40% federal, assuming a federal estate tax deduction for state estate taxes paid). Aggregate taxes may be higher still for assets which may still be subject to income tax, such as a traditional IRA.
- Due to these changes, some estates could potentially see a reduction in estate tax, while others might see an increase. Below are 2 hypothetical examples.
How your estate tax rate could change
These hypothetical examples show the potential change in the Washington state estate taxes before and after the new legislation.
| Gross estate | Washington estate tax, on or before 6/30/2025 | Washington estate tax, on or after 7/1/2025 |
|---|---|---|
| $5,000,000 | $361,050 | $250,000 |
| $20,000,000 | $3,251,400 | $4,730,000 |
Note: Hypotheticals reflect no deductions or adjustments for out-of-state property, and do not include potential federal estate tax. The tax on or before 6/30/2025 assumes applying a $2,193,000 exclusion and tax brackets from 10-20%. The tax on or after 7/1/2025 assumes applying a $3,000,000 exclusion and tax brackets from 10-35%. For a complete list of tax brackets, see RCW 83.100.040.
Capital gains tax changes
Previously, the capital gains tax was set at 7%, on top of a standard deduction of $270,000 (for 2024, adjusted annually for inflation). The new law applies to Washington net long-term capital gains exceeding $1,000,000, above the standard deduction.
- The tax does not apply to short-term capital gains, real estate, assets held in certain retirement accounts, and other types of income.
- The new tax rate is effective retroactive to January 1, 2025.
Planning considerations
In light of these changes, you may want to consider whether certain estate planning strategies could help you optimize your plan for the new tax environment. For example:
- Gifting assets during your lifetime may be more tax-efficient than retaining them, in an effort to reduce state estate tax.
- Sophisticated trusts, such as a grantor retained annuity trust (GRAT), intentionally defective grantor trust (IDGT), or a spousal lifetime access trust (SLAT) may help you maximize the amount you are able to pass on to your heirs.
- Estate plans including certain irrevocable trusts for a surviving spouse (e.g., bypass trusts) may help married couples capture the benefit of the first spouse’s state estate tax exclusion.
- For those with charitable intentions, gifting appreciated assets and utilizing donor-advised funds or charitable trusts may not only help you increase the impact of your donation and reduce your taxable estate, they could potentially provide a tax benefit in the near term, as well.
- Some Washingtonians may consider relocating to another state. In the event you were to consider moving to a lower-tax state, it’s important to understand the potential tax and estate planning implications that might entail, to help ensure you are actually benefiting from the change in jurisdiction.
Next steps
Given the intricacies of the new law and the complexities at play for your estate plan, it may be wise to consult with a tax attorney or financial professional before taking action. That way, you can fully understand your options and the effects that any changes to your plan might have.