Gift Taxes Paid Continue as Washington Taxable Estate Assets for Three Years

Making gifts shortly prior to death does not eliminate the federal gift taxes paid from a Washington resident’s estate.  Washington’s Supreme Court recently released a decision requiring federal gift taxes paid within three years of death must be included in a Washington taxable estate if required to be included in a federal taxable estate.  Estate of Ackerley v. Department of Revenue, 92791-0.  Barry A. Ackerly died on March 21, 2011. Prior to his death, Mr. Ackerley made federally taxable gifts in 2008 and 2010.  He paid federal gift tax of over $5.5 million on those gifts.  Mr. Ackerely’s estate included the value of those gift taxes on his federal estate tax return as required by IRC § 2035(b), but failed to include those taxes on his Washington estate tax return.  Mr. Ackerly’s estate petitioned superior court for review when the Department of Revenue issued a deficiency notice. The Thurston County Superior Court determined the gift taxes were included in Washington taxable estates at death, and the Washington Supreme Court affirmed the decision, with a dissenting opinion.

The Supreme Court noted it previously applied a narrow definition of transfers at death, but that the legislature changed the law to clarify that Washington taxable estates are defined the same as federal taxable estates. Ackerly at FN 1 (referencing In re Estate of Bracken, 175 Wn.2d 549, 290 P.3d 99 (2012) regarding a testamentary QTIP trust). The legislature defines Washington transfers at death by reference to 26 U.S.C. § 2001 and taxable estates by reference to 26 U.S.C. § 2044. RCW 83.100.020(14) & (15). The court determined that the legislative intent requires that transfer be given the same broad definition as the federal definition. Thus, transfers at death in Washington include the same assets as the federal taxable estate transferred at death.

Justice Wiggins disagreed with the majority. Both the majority opinion and the dissent agree that Washington’s estate tax is an excise tax – a tax on transfer of assets. The majority viewed estate tax as an excise tax on an event, an individual’s death, where the death changes legal relationships affecting property. The dissent focused on whether or not a transfer occurred, and not simply the legislature’s intent in defining taxable estate. The dissent viewed federal gift taxes paid during life as fully completed lifetime transfers.  The dissent further opined that excise taxes are imposed on shifting use or enjoyment of property between parties, which cannot occur at death if the transfer is completed during life.  The dissent further noted the difference between the federal estate and gift tax with a history of treating gifts in contemplation of death as testamentary transfers, as opposed to Washington’s simple estate tax that does not address lifetime gifts as a testamentary transfer.

Washington defines a taxable estate using the federal definition, which includes gift taxes paid in the three years prior to death. Gifting can be an important part of estate planning and transferring assets out of your estate, but Washington residents should be cautions of estate tax implications of gift transfers near death.

If you would like to read the case, it can be found here.