Wealth Management in Washington

The estate tax most Washington households underestimate

Washington taxes estates at death, and its exemption is lower than the federal one by a wide margin. The state exempts an amount of a few million dollars per person and then taxes the portion above it at a graduated rate that climbs to the highest top rate in the country. There is no inheritance tax, and there is no state gift tax, but lifetime taxable gifts are added back when calculating the estate. Unlike the federal system, Washington does not allow a surviving spouse to claim the unused exemption of the first spouse to die. If the first spouse’s exemption is not used, it disappears.

The result is that households that do not think of themselves as rich can owe tax. Consider a couple in Seattle who bought a home in the 1990s, now worth two million dollars, with retirement accounts of a million and a half, a life insurance policy of a million and a modest brokerage account. Their combined estate could exceed what the second spouse’s exemption covers, and the tax is due within a short time after death. According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, the median home in Washington is valued near $564,600, and in King County the figure is much higher, so many homeowners are closer to the line than they realize.

Every one of these tools has rules, and the law has changed in recent years, so an attorney who focuses on Washington estates should draft the documents. A wealth manager’s role is to run the numbers, coordinate the title of assets and make sure the plan is funded. Our estate planning guide explains the basics of trusts and beneficiary forms.

Community property: a different set of rules

Washington is one of a handful of community property states. In general, income and assets acquired during marriage belong equally to both spouses, whatever name is on the account, while property owned before marriage or received as a gift or inheritance stays separate. Several things follow. In a divorce, community assets are divided fairly rather than by title. At the first spouse’s death, both halves of a community asset can receive a new cost basis for income tax purposes, which can erase large capital gains and is one reason community property couples should think carefully before selling appreciated assets late in life. Commingling separate and community funds can turn separate property into community property, so records matter. Couples can also sign agreements that change how property is classified. These choices affect everything from the beneficiary on a life insurance policy to the title on a house, so the estate plan, the investment plan and the tax plan have to fit together.

The capital gains excise tax

Since 2022, Washington has charged an excise tax on long-term capital gains from sales of stocks, bonds and other assets above a high annual threshold. Real estate, retirement accounts and certain other assets are generally exempt, and there are deductions for some family-owned business sales and for charitable gifts. Rates rise in tiers for very large gains. For most households the tax never applies, but for founders, executives and others who sell large amounts of stock in a single year, it can add a significant line to the tax bill. A wealth manager helps in three ways. First, by projecting gains before the year ends. Second, by spreading sales across years, where possible, so each year stays under the threshold. Third, by using losses and charitable gifts of appreciated shares to reduce the taxable amount. Confirm current rates and thresholds with the Washington Department of Revenue before a large sale. Our tax planning guide covers the federal rules that sit on top.

Restricted stock, options and the vesting calendar

Employees of the region’s technology companies often receive most of their pay in equity. Restricted stock units vest on a schedule, typically quarterly, and are taxed as ordinary income when they vest. Employers usually withhold federal tax at a flat supplemental rate that can be lower than your actual bracket, which leaves a surprise bill in April for high earners. Employee stock purchase plans offer shares at a discount, and the tax depends on how long you hold them. Incentive stock options can trigger the alternative minimum tax when exercised. Each of these needs planning: estimating the true tax, setting aside cash to pay it, deciding how much to sell at each vest and how to diversify what remains. Because Washington has no wage income tax, many employees overlook state-level planning, but the federal bill is large and the capital gains excise tax can apply to later sales.

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Founders and family businesses

Washington has a long list of founder-owned companies, from software startups to breweries, contractors and family farms. A sale or transfer takes years of preparation. Owners should estimate what the business is worth, tidy the books, reduce dependence on themselves and consider the state’s business and occupation tax, which applies to gross revenue rather than profit and affects pricing and valuation. The structure of a sale matters. Selling assets and selling shares are taxed differently, part of the price may be deferred, and part may depend on future performance. The capital gains excise tax may apply to some sales, and a deduction may be available for qualifying family-owned businesses. Estate planning for owners is especially important in a state with a low exemption, since a business can lift an otherwise modest estate over the threshold.

Doctors and researchers

Seattle’s hospitals, research institutes and the University of Washington employ many physicians and scientists. Their financial pattern is familiar: years of training, student debt and delayed saving, followed by high income. A wealth manager organizes priorities in sequence, usually starting with disability insurance, then paying down high-interest debt, then maximizing retirement plans, including 403(b) and 457(b) options, then building a taxable portfolio. Physician practice owners add questions about buying in, real estate and an eventual sale.

What wealth managers charge

Most bill a yearly percentage of assets under management, quarterly, with the rate falling at higher balances. A rate near one percent on the first million is common. A retainer is the main alternative and fits situations where complexity outweighs portfolio size. Fund expenses, trading costs and insurance commissions come on top, so ask for one combined figure and the schedule of breakpoints. Minimums commonly sit in the hundreds of thousands of dollars, with exceptions for people about to receive a large vest or a sale.

Washington rules in brief

No wage income tax. Salary, bonuses, pensions and IRA withdrawals face no state income tax.

Estate tax, no inheritance tax. The exemption is low and not portable between spouses.

Capital gains excise tax. It applies to large long-term gains on stocks and similar assets, with exemptions.

Community property. Marital property is generally owned equally.

Sales and B&O taxes. Consumption and business taxes replace much of the income tax.

Oversight. The Department of Financial Institutions’ Securities Division oversees smaller investment advisers, and the Office of the Insurance Commissioner licenses agents.

Choosing a firm

Write down what must be coordinated: stock awards, a business, an estate that may owe tax, a blended family. Verify the firm and each advisor in the SEC adviser database and on BrokerCheck, and for small firms confirm state registration. Form ADV Part 2 shows what the firm sells, who owns it and how it earns money. Find out who will run the portfolio, who will talk to your attorney and accountant, and how often you will meet. Insist on a single dollar figure for annual cost. Finally, describe your own situation and listen for specifics, because a firm that has worked with tech equity, founders or Washington estates will say so. Our investing basics guide explains how portfolios are built.

Giving, legacy and retirement income

Donor-advised funds are popular with Washington households that hold appreciated stock, since a gift of shares avoids both federal tax and the state excise tax on the gain and produces a deduction. After age 70 and a half, qualified charitable distributions send IRA money directly to charity. Retirement accounts are efficient assets to leave to charity, because heirs generally owe income tax on what they inherit from them, while family members receive other assets. Retirement income planning at higher balances focuses on federal tax, since the state does not tax withdrawals. Required distributions can raise Medicare premiums and push income into higher brackets, so advisors often plan years early with partial Roth conversions. Our retirement planning guide explains how withdrawals are sequenced. One last step is to tell the family what the plan is and why, because heirs who understand a plan are less likely to contest it.

Frequently asked questions