Estate Planning Primer for Washingtonians

Bordeaux Wealth Advisors | May 26, 2023

The intent of this article is to identify ways to save time and energy, making the estate planning process more efficient.  Our goal with this primer is to provide a framework for people just beginning the process.  Having a basic understanding of the landscape of federal and Washington State law can help guide conversations and avoid common errors.

A basic estate plan typically includes:

  • Will or Trust – The document that directs the disposition of assets at death.
  • Financial Durable Power of Attorney – A legal document that authorizes a specific person to make financial decisions if you are incapacitated.
  • Health Care Durable Power of Attorney – A legal document that authorizes a specific person to make medical decisions if you are incapacitated.
  • Advance Directive for Health Care – A legal document that allows you to specify what treatments you do or do not want in case of a terminal condition.

These documents ought to be prepared and periodically updated by all adults. This includes children going off to college so that parents can act on their child’s behalf if needed. An estate can include any asset ownership, from a home to a business to an investment portfolio (any single asset or mix of assets may constitute an estate).

Many attorneys specialize in Trust & Estate law here in Washington, and often can be referred by other experts, such as CPAs and financial advisors. These lawyers meet with clients to understand their situation and specific goals, and draft customized plans to accomplish their objectives, ranging from simple to very complex.

In addition to determining delegation for decision-making if incapacitated and /or guidance if diagnosed with a terminal condition, most people look to accomplish the following when developing an estate plan: (1) establish clear and inarguable instructions to distribute assets owned by the estate, (2) specify guardianship for children (if applicable) and (3) minimize taxes.

Exploring a first step of sophistication beyond a simple will for asset disposition

A Revocable Living Trust can be a useful document that provides guidance on managing assets and how to distribute your assets at death, without having to go through the probate process required if only a will exists.  A good attorney can draft this kind of trust to establish how a person’s or couple’s assets will be managed during their lifetime, and how to distribute them after they pass.  A person or couple retitles assets into the trust, plus future assets acquired, and because the trust is fully revocable, they retain control over the assets as trustee(s). Upon death, the designated successor trustee follows the instructions in the trust to distribute the assets. The trust may be changed or terminated at any time, based on its revocable status. Because it’s revocable and not permanent, there is no tax benefit as nothing is transferred out of the estate before death.

Why use a revocable living trust in addition to a will?

Assets titled in a revocable living trust will skip the probate process and maintain privacy since the trust is not publicly filed with the court. However, a revocable living trust has costs associated with its benefits: (a) it is generally more complicated and thus more expensive to create than a will, (b) all of your existing assets and any newly acquired must be transferred into the trust, and (c) third parties dealing with the trustee (such as loan providers) may want to review the trust language to verify the trustee’s powers and scope. In Washington State, the probate process is relatively simple and efficient for those designated to finalize affairs so Living Trusts are not as common as in other states with more burdensome regulations. For people owning property in other states, or those contemplating a move to another state, Living Trusts can help them avoid dealing with more complicated probate laws in other locales.

Why tax consequences may drive behavior

The current Federal estate tax law allows for generous exemptions from Federal estate taxes, however the exemption amount declines significantly after 2025. The Federal Estate Tax Exemption is $12.92 million per individual for 2023, which equates to $25.84 million for a married couple if the estate plan is properly structured.  The exemption is scheduled to increase through 2025 and is indexed for inflation but will be reduced by approximately one-half to $6.8 million per person in 2026 if the law is not changed before the expiration.  If your estate is above the exclusion threshold, the Federal estate tax rates range from 18% up to 40%.

In Washington State, each person gets a State Estate Tax exclusion of $2.193 million.  If a married spouse survives, there is no estate tax unless separate property exists WITH directions to dispose or gift away from the spouse, AND the value of the separate property exceeds the individual exclusion amount.  Washington state imposes an estate tax between 10% and 20% of the excess depending on the size of the estate.

Should I explore establishing more complex trust & estate plans?

If your marital estate is above the current $26 million threshold, there are additional strategies available that may help minimize taxes.  If you own a private business with the potential to grow (or it already has a high value) and do not want your heirs to be forced to sell the business to pay estate taxes, it is essential to put other estate planning vehicles in place.  As your personal situation changes and tax law evolves, it is important to reassess your current estate plan.  The estate exemption drops dramatically in 2026 if the current law is not changed, so there is an opportunity to take advantage of the higher exemption amount before year-end in 2025.

Many of the strategies to minimize estate taxes involve making irrevocable gifts or transfers of your assets.  It is important to remember that these transfers may save estate taxes for your heirs, but the gifts are typically irrevocable and cannot be changed.  Your heirs may appreciate your generosity and effective tax planning, but you must understand and be comfortable with the transfer of control and loss of access to the wealth you created.

If you value flexibility and want full access to utilizing your current assets to continue to grow the size of your estate, then you should carefully consider any permanent transfer of assets out of your estate.  You may save your heirs taxes, but it will most likely limit your financial flexibility during your life.

If you are confident that you can maintain your lifestyle, easily support large expenditures and want to minimize the estate taxes, then gifting and transferring assets to your family or charities can be accomplished with a variety of more advanced strategies. These strategies can minimize taxes for your family and create a legacy for heirs and support charities that you care about.  Contact a professional to set up an appointment to discuss these ideas further.  Our experience at Bordeaux Wealth Advisors shows that these conversations and careful planning can provide tremendous benefits for your family and the causes you care about.

Important Disclosures

The material has been gathered from sources believed to be reliable, however BWA cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which strategies may be appropriate for you, consult your tax and financial professionals. Investment Advisory services are offered through Bordeaux Wealth Advisors, LLC. Advisory services are only offered where Bordeaux and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.