Washington Administrative Code › Title 458 - Revenue, Department of › Chapter 458-57 - State of Washington Estate and Transfer Tax Reform Act rules › Section 458-57-115 - Valuation of property, property subject to estate tax, and how to calculate the tax

Current through Register Vol. 24-14, July 15, 2024
(1)
Introduction.
This rule applies to deaths occurring on or after
			 May 17, 2005, and is intended to help taxpayers prepare their return and pay
			 the correct amount of Washington state estate tax. It explains the necessary
			 steps for determining the tax and how the tax is calculated. The estate tax
			 rule on valuation of property etc., for deaths occurring on or before May 16,
			 2005, can be found in WAC
			 458-57-015.
(2)
Determining the property subject to
			 Washington's estate tax.
(a)
General valuation information.
The value of every item of property
			 in a decedent's gross estate is its date of death fair market value. However,
			 the personal representative may elect to use the alternate valuation method
			 under section 2032 of the Internal Revenue Code , and in that case the value is
			 the fair market value at that date, including the adjustments prescribed in
			 that section of the Internal Revenue Code. The valuation of certain farm
			 property and closely held business property, properly made for federal estate
			 tax purposes pursuant to an election authorized by section 2032A of the
			 Internal Revenue Code of 2005 , is binding on the estate for state estate tax
			 purposes.
(b)
How is the
			 gross estate determined?
The first step in determining the value of a
			 decedent's Washington taxable estate is to determine the total value of the
			 gross estate. The value of the gross estate includes the value of all the
			 decedent's tangible and intangible property at the time of death. In addition,
			 the gross estate may include property in which the decedent did not have an
			 interest at the time of death. A decedent's gross estate for estate tax
			 purposes may therefore be different from the same decedent's estate for local
			 probate purposes. Sections 2031 through 2046 of the Internal Revenue Code
			 provide a detailed explanation of how to determine the value of the gross
			 estate.
(c)
Deductions from
			 the gross estate.
The value of the taxable estate is determined by
			 subtracting the authorized exemption and deductions from the value of the gross
			 estate. Under various conditions and limitations, deductions are allowable for
			 expenses, indebtedness, taxes, losses, charitable transfers, and transfers to a
			 surviving spouse. While sections 2051 through 2056A of the Internal Revenue
			 Code provide a detailed explanation of how to determine the value of the
			 taxable estate the following areas are of special note:
(i)
Funeral expenses.
(A) Washington is a community property state
			 and under Estate of Julius C. Lang v. Commissioner, 97 Fed. 2d 867 (9th Cir.
			 1938) affirming the reasoning of Wittwer v. Pemberton, 188 Wash. 72, 76, 61
			 P.2d 993 (1936) funeral expenses reported for a married decedent must be
			 halved. Administration expenses are not a community debt and are reported at
			 100%.
(B)
Example.
John, a married man, died in 2005 with an estate valued at $2.5 million. On
			 Schedule J of the federal estate tax return listed following as expenses:
SCHEDULE J - Funeral Expenses and
						Expenses Incurred in Administering Property Subject to Claims
Item Number
Description
Expense Amount
Total Amount
1
A. Funeral expenses:
Burial and services
$4,000
$2,000
(1/2 community debt)
($2,000)
Total funeral expenses ............
B. Administration expenses:
1. Executors' commissions - amount
						estimated/agreed upon paid. (Strike out the words that do not apply.)
						.....................................
$10,000
2. Attorney fees - amount estimated/agreed
						upon/paid. (Strike out the words that do not apply.)
						..............................................
$5,000
The funeral expenses, as a community debt, were properly
				reported at 50% and the other administration expenses were properly reported at
				100%.
(ii)
Mortgages and liens on real property.
Real property listed on
			 Schedule A should be reported at its fair market value without deduction of
			 mortgages or liens on the property. Mortgages and liens are reported and
			 deducted using Schedule K.
(iii)
Washington qualified terminable interest property (QTIP) election.
(A) A personal representative may choose to
			 make a larger or smaller percentage or fractional QTIP election on the
			 Washington return than taken on the federal return in order to reduce
			 Washington estate liability while making full use of the federal unified
			 credit.
(B) Section 2056(b)(7) of
			 the Internal Revenue Code states that a QTIP election is irrevocable once made.
			 For the taxpayer that makes this election, any amount deducted by reason of
			 section 2056(b)(7) of the Internal Revenue Code is added to, and the value of
			 the property for which a Washington election is made is deducted from, the
			 Washington taxable estate. For the estate of the surviving spouse, the amount
			 included in the estate's gross estate pursuant to section 2044(a) and (b)(1)(A)
			 of the Internal Revenue Code is deducted from, and the value of any property
			 for which an election under this section was previously made is added to, the
			 Washington taxable estate. A QTIP election made on the Washington return is
			 irrevocable, and a surviving spouse who is the lifetime beneficiary of property
			 for which a Washington QTIP election was made must include the value of the
			 remaining property in his or her gross estate for Washington estate tax
			 purposes. If the value of property for which a federal QTIP election was made
			 is different, this value is not includible in the surviving spouse's gross
			 estate for Washington estate tax purposes; instead, the value of property for
			 which a Washington QTIP election was made is includible.
(C) The Washington QTIP election must
			 adequately identify the assets, by schedule and item number, included as part
			 of the election, either on the return or, if those assets have not been
			 determined when the estate tax return is filed, on a statement to that effect,
			 prepared when the assets are definitively identified. Identification of the
			 assets is necessary when reviewing the surviving spouse's return, if a return
			 is required to be filed. This statement may be filed with the department at
			 that time or when the surviving spouse's estate tax return is filed.
(iv)
Washington qualified
			 domestic trust (QDOT) election.
(A) A
			 deduction is allowed for property passing to a surviving spouse who is not a
			 U.S. citizen in a qualified domestic trust (a "QDOT"). An executor may elect to
			 treat a trust as a QDOT on the Washington estate tax return even though no QDOT
			 election is made with respect to the trust on the federal return; and also may
			 forgo making an election on the Washington estate tax return to treat a trust
			 as a QDOT even though a QDOT election is made with respect to the trust on the
			 federal return. An election to treat a trust as a QDOT may not be made with
			 respect to a specific portion of an entire trust that otherwise would qualify
			 for the marital deduction, but if the trust is actually severed pursuant to
			 authority granted in the governing instrument or under local law prior to the
			 due date for the election, a QDOT election may be made for any one or more of
			 the severed trusts.
(B) A QDOT
			 election may be made on the Washington estate tax return with respect to
			 property passing to the surviving spouse in a QDOT, and also with respect to
			 property passing to the surviving spouse if the requirements of section
			 2056(d)(2)(B) of the Internal Revenue Code are satisfied. Unless specifically
			 stated otherwise herein, all provisions of sections 2056(d) and 2056A of the
			 Internal Revenue Code, and the federal regulations promulgated thereunder, are
			 applicable to a Washington QDOT election. Section 2056A(d) of the Internal
			 Revenue Code states that a QDOT election is irrevocable once made. Similarly, a
			 QDOT election made on the Washington estate tax return is irrevocable. For
			 purposes of this subsection, a QDOT means, with respect to any decedent, a
			 trust described in section 2056A(a) of the Internal Revenue Code, provided,
			 however, that if an election is made to treat a trust as a QDOT on the
			 Washington estate tax return but no QDOT election is made with respect to the
			 trust on the federal return:
(I) The trust
			 must have at least one trustee that is an individual citizen of the United
			 States resident in Washington state, or a corporation formed under the laws of
			 the state of Washington, or a bank as defined in section 581 of the Internal
			 Revenue Code that is authorized to transact business in, and is transacting
			 business in, the state of Washington (the trustee required under this
			 subsection is referred to herein as the "Washington Trustee");
(II) The Washington Trustee must have the
			 right to withhold from any distribution from the trust (other than a
			 distribution of income) the Washington QDOT tax imposed on such
			 distribution;
(III) The trust must
			 be maintained and administered under the laws of the state of Washington;
			 and
(IV) The trust must meet the
			 additional requirements intended to ensure the collection of the Washington
			 QDOT tax set forth in (c)(iv)(D) of this subsection.
(C) The QDOT election must adequately
			 identify the assets, by schedule and item number, included as part of the
			 election, either on the return, or, if those assets have not been determined
			 when the estate tax return is filed, or a statement to that effect, prepared
			 when the assets are definitively identified. This statement may be filed with
			 the department at that time or when the first taxable event with respect to the
			 trust is reported to the department.
(D) In order to qualify as a QDOT, the
			 following requirements regarding collection of the Washington QDOT tax must be
			 satisfied.
(I) If a QDOT election is made to
			 treat a trust as a QDOT on both the federal and Washington estate tax returns,
			 the Washington QDOT election will be valid so long as the trust satisfies the
			 statutory requirements of Treas. Reg. Section 20.2056A-2(d).
(II) If an election is made to treat a trust
			 as a QDOT only on the Washington estate tax return, the following rules apply:
If the fair market value of the trust assets exceeds $2 million
				as of the date of the decedent's death, or, if applicable, the alternate
				valuation date, the trust must comply with Treas. Reg. Section
				20.2056A-2(d)(1)(i), except that: If the bank trustee alternative is used, the
				bank must be a bank that is authorized to transact business in, and is
				transacting business in, the state of Washington, or a bond or an irrevocable
				letter of credit meeting the requirements of Treas. Reg. Section
				20.2056A-2(d)(1)(i)(B) or (C) must be furnished to the department.
If the fair market value of the trust assets is $2 million or
				less as of the date of the decedent's death, or, if applicable, the alternate
				valuation date, the trust must comply with Treas. Reg. Section
				20.2056A-2(d)(1)(ii), except that not more than 35 percent of the fair market
				value of the trust may be comprised of real estate located outside of the state
				of Washington.
A taxpayer may request approval of an alternate plan or
				arrangement to assure the collection of the Washington QDOT tax. If such plan
				or arrangement is approved by the department, such plan or arrangement will be
				deemed to meet the requirements of this (c)(iv)(D).
(E) The Washington estate tax will
			 be imposed on:
(I) Any distribution before the
			 date of the death of the surviving spouse from a QDOT (except those
			 distributions excepted by section 2056A(b)(3) of the Internal Revenue Code);
			 and
(II) The value of the property
			 remaining in the QDOT on the date of the death of the surviving spouse (or the
			 spouse's deemed date of death under IRC section 2056A(b)(4) ). The tax is
			 computed using Table W. The tax is due on the date specified in IRC section
			 2056A(b)(5). The tax shall be reported to the department in a form containing
			 the information that would be required to be included on federal Form 706-QDT
			 with respect to the taxable event, and any other information requested by the
			 department, and the computation of the Washington tax shall be made on a
			 supplemental statement. If Form 706-QDT is required to be filed with the
			 Internal Revenue Service with respect to a taxable event, a copy of such form
			 shall be provided to the department. Neither the residence of the surviving
			 spouse or other QDOT beneficiary nor the situs of the QDOT assets are relevant
			 to the application of the Washington tax. In other words, if Washington state
			 estate tax would have been imposed on property passing to a QDOT at the
			 decedent's date of death but for the deduction allowed by this subsection
			 (c)(iv)(E) (II), the Washington tax will apply to the QDOT at the time of a
			 taxable event as set forth in this subsection (c)(iv)(E)(II) regardless of, for
			 example, whether the distribution is made to a beneficiary who is not a
			 resident of Washington, or whether the surviving spouse was a nonresident of
			 Washington at the date of the surviving spouse's death.
(F) If the surviving spouse of the decedent
			 becomes a citizen of the United States and complies with the requirements of
			 section 2056A(b)(12) of the Internal Revenue Code, then the Washington tax will
			 not apply to: Any distribution before the date of the death of the surviving
			 spouse from a QDOT; or the value of the property remaining in the QDOT on the
			 date of the death of the surviving spouse (or the spouse's deemed date of death
			 under section 2056A(b)(4) of the Internal Revenue Code).
(d)
Washington taxable
			 estate.
The estate tax is imposed on the "Washington taxable estate."
			 The "Washington taxable estate" is defined in WAC
			 458-57-105(3)(t).
(e)
Federal taxable estate.
The
			 "federal taxable estate" is defined in WAC
			 458-57-105(3)(i).