Reduce Washington Estate Tax with Estate Tax Credit Shelter Trusts

If you are domiciled in Washington, you should understand how Washington’s estate tax may affect your estate. Although the state recently increased its exemption amount, many people still have estates that exceed the taxable threshold. For those estates, Washington’s top estate tax rate is now 35 percent, a significant increase from the prior 20 percent top rate that applied before July 2025. The good news is that for married couples, Washington estate tax can often be reduced or minimized with proper planning. Unmarried individuals can also benefit from estate tax reduction planning, but the focus of this blog will be the use of estate tax credit shelter trusts, which is only available for married individuals.

Washington is one of 12 states that imposes a separate state estate tax. This tax is in addition to any applicable federal estate tax, although many Washington residents are not subject to federal estate tax because the federal exemption is substantially higher ($15 million per individual in 2026). For deaths occurring after July 2025, Washington increased its estate tax exemption from $2,193,000 to $3,000,000. The exemption is now indexed for inflation each year. As of 2026, the exemption amount is $3,076,000. If the value of your estate exceeds the exemption in the year of death, the amount above that exemption is subject to Washington estate tax. Washington’s estate tax rates are progressive. The lowest bracket begins at 10 percent, and the highest rate is 35 percent for the largest taxable estates. Prior to July 2025, the top rate was 20 percent. This change significantly increased potential tax exposure for higher value estates. It is important to understand that Washington’s estate tax is based on the net estate, not simply the gross value of all assets. Debts, certain administration expenses, and allowable deductions are subtracted from the gross estate to determine the taxable estate.

For Washington estate tax purposes, the value of the estate is determined as of the decedent’s date of death. This includes all assets in which the decedent held an ownership interest at the time of death. Real property is typically appraised to establish its fair market value on the date of death. Retirement accounts, brokerage accounts, and other financial assets are valued based on account balances and market prices as of that date. Bank accounts are included at their date of death balances. Business interests often require formal appraisals, which can be complex and expensive. One commonly overlooked asset is term life insurance. Many people assume that because a term policy has no cash value during life, it does not count towards the value of the estate. However, if the decedent owned the policy, the full death benefit is included in the taxable estate. Term policies are not uncommonly issued in amounts up to $1 million, either as an employee benefit or purchased separately, and these proceeds can substantially increase the estate’s value for tax purposes. Washington also considers assets located outside the state, such as out of state real property. Non-Washington assets are not simply ignored. Instead, Washington applies a fractional calculation. The total value of all assets is determined first. Then a fraction is applied, with Washington situs assets as the numerator and total assets as the denominator. This approach can result in Washington estate tax even when some assets are located elsewhere.

For married couples, one of the most effective strategies to reduce Washington estate tax is the use of an estate tax credit shelter trust. These trusts are also commonly known as bypass trusts or disclaimer trusts. Although the funding mechanics may differ, their purpose is consistent: to allow both spouses to fully use their individual Washington estate tax exemptions. Under Washington law, transfers to a surviving spouse are generally deductible and not subject to estate tax at the first spouse’s death. This is often referred to as the marital deduction. While this sounds beneficial, leaving everything outright to the surviving spouse can waste the first spouse’s exemption. For simplicity, I’ll round the exemption to $3 million. If the first spouse dies and leaves all assets outright to the surviving spouse, no Washington estate tax is due at that time because of the marital deduction. However, the first spouse’s $3 million exemption goes unused. When the surviving spouse later dies, only that spouse’s single exemption is available. This can result in a larger taxable estate and higher overall tax. A credit shelter trust preserves the first spouse’s exemption. At the first death, assets equal to the exemption amount are placed into a separate trust. That trust is structured so that it is not included in the surviving spouse’s taxable estate at their later death. The surviving spouse may still benefit from the trust during life, but the trust assets and any appreciation on them are excluded from estate tax when the survivor dies. At the survivor’s death the assets in the trust are distributed to the beneficiaries along with the survivor’s estate assets. With proper planning, a married couple can effectively shelter approximately $6 million (combining their exemptions), assuming a $3 million exemption for each spouse, rather than only the $3 million.

Consider a married couple with a combined estate of $7 million. Assume each spouse effectively owns $3.5 million. Without estate tax planning, the first spouse dies and leaves everything outright to the surviving spouse. The survivor now owns the full $7 million estate. At the survivor’s death, only $3 million is exempt from Washington estate tax. The remaining $4 million is subject to tax. Based on current rates, the approximate tax could be about $610,000. Now consider the same facts with a credit shelter trust in place. At the first spouse’s death, $3 million is allocated to the credit shelter trust. The remaining $500,000 passes outright to the surviving spouse. The surviving spouse’s estate now is valued at $4 million: their original $3.5 million plus $500,000 (assets from the decedent not passing to the credit shelter trust). When the surviving spouse later dies, they can shelter $3 million of their $4 million estate with their own exemption. Only $1 million is subject to Washington estate tax. The approximate tax in this scenario would be about $100,000. The difference between the two scenarios is roughly $510,000 in estate tax savings. That amount remains available for beneficiaries rather than being paid to the state.

Washington’s estate tax can significantly reduce the amount ultimately passing to beneficiaries, especially in larger estates. Although the exemption has increased, the higher top tax rate means careful planning is more important than ever. Credit shelter trusts are a proven and effective strategy for married couples who may have a taxable estate. They can often be incorporated into an estate plan with relatively modest additional cost compared to the potential tax savings. If you are domiciled in Washington or own property in the state, reviewing your estate plan with a knowledgeable estate planning attorney can help ensure that your documents are structured to minimize Washington estate tax exposure and preserve more of your legacy for your family.