2025 Estate, Gift and GST Tax Exemptions
As we approach the end of 2025, significant changes to both federal and Washington State estate and gift tax laws are on the horizon. These impending adjustments could substantially impact estate planning strategies, especially for residents of Washington State.Federal Estate and Gift Tax Changes
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the federal estate and gift tax exemption, allowing individuals to transfer up to $13.61 million in 2024 without incurring federal estate taxes. However, this elevated exemption is set to expire on December 31, 2025. Absent legislative action, the exemption will revert to approximately $7 million per individual in 2026, adjusted for inflation.
This reduction means that estates valued between the current and forthcoming exemption thresholds could become subject to federal estate taxes, potentially at rates up to 40%.
Washington State Estate Tax Considerations
In addition to federal taxes, Washington State imposes its own estate tax, with an exemption amount significantly lower than the federal threshold. For 2024, the Washington State estate tax exemption is $2.193 million. Estates exceeding this amount are subject to state estate taxes, with rates ranging from 10% to 20%, depending on the estate’s value.
Notably, Washington does not have a gift tax. This allows residents to make lifetime gifts without incurring state gift taxes, providing a strategic avenue to reduce the taxable estate.
Implications for Washington Residents
The impending reduction in the federal exemption, coupled with Washington’s lower state exemption, underscores the importance of proactive estate planning for residents. Without appropriate strategies, a larger portion of an estate could be subject to both federal and state taxes, diminishing the wealth passed on to heirs.
Strategic Planning Recommendations
Lifetime Gifting: Utilize the current higher federal exemption by making substantial gifts before the end of 2025. This approach leverages the temporary elevated exemption and Washington’s absence of a gift tax.
Trust Formation: Establish irrevocable trusts to remove assets from the taxable estate, potentially reducing both federal and state estate tax liabilities.
Regular Plan Reviews: Given the dynamic nature of tax laws, regularly review and adjust estate plans to align with current regulations and personal circumstances.
Conclusion
The upcoming changes to federal and Washington State estate and gift tax laws present both challenges and opportunities. By understanding these changes and implementing strategic planning, Washington residents can effectively manage their estate tax liabilities and ensure their wealth is preserved for future generations.