Washington's Tax Trifecta with Derek Jensen

In this Season One finale, estate attorney Derek Jensen goes solo to break down Washington State's changing tax landscape and why most families remain dangerously unprotected despite the new laws.

On July 1st, Washington's top estate tax rate drops from 35% to 20%. That sounds like good news. But the exemption is also pulling back, the gap between Washington's $3M threshold and the federal $15M exemption hasn't changed, and an estimated 100,000–150,000 Washington households are still caught in the middle.

Derek unpacks Washington's "Tax Stack" — the only state in the country with estate tax, capital gains tax, and an income tax all aimed at accumulated wealth. He shares why outdated plans are quietly creating expensive problems, what a "right-sized" plan actually looks like at 35 versus 55, and what three forces (the $124 trillion wealth transfer, rising fiscal pressure, and UBI policy) tell us about where this is all heading.

And he ends where the show began: with his own family, the lake property, and a confession — that even after years of advising families through this, he's still in the middle of it himself.

"You don't wait for consensus. You don't wait for the perfect legislative environment. You started anyway."

Resources mentioned: WashingtonEstateTax.com: calculator, Washington tax breakdown, what changed July 1st

Learn more about Who Gets What?: https://whogetswhat.fm/ 

This podcast is presented by Jensen Estate Law and produced by Marguerite Productions.

Transcript

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Hi, I'm Derek Jensen, a state attorney and host of Who Gets What. This is the last episode of season one, and I want to start by saying thank you. Thank you for spending part of your Thursdays with me this year. We've covered a lot of ground, family wealth stories, what it actually means to raise the next generation of our own money. What happens when inheriting wealth feels more like a burden than a gift? We've had some really remarkable conversations, and I hope they've opened up questions for you that maybe weren't on your radar before. Today I want to do something a little different. No guest, just me. And I want to use this episode to tie a thread through everything we've been talking about, because I think there's a moment happening right now, in Washington state specifically, that makes this conversation urgent in a way it hasn't been before. On July 1st, Washington's estate tax changes. And I want to talk about what that means, why it matters, and honestly, why most families are still not protected regardless of what the legislature does. Let me start with the good news, because there is some. Washington's top estate tax rate is dropping on July 1st. Right now it sits at 35%, the highest any state has ever imposed. As of July 1st, it comes down to 20%. That's a meaningful reduction, and it's worth acknowledging. But before you exhale, I want to make sure you understand what's actually changing and what isn't. In addition to the estate tax, we've also increased our capital gains tax in recent years and have added a new income tax. We're the only state in the country that's taxing all three. It's a trifecta. Let's take a second and dig into the details of the Washington estate tax. At the beginning of last year, Washington's exemption was $2.193 million, an amount that had increased by indexing from $2 million. However, the indexing was broken. The number hadn't moved in years. In addition, at that time, Washington's estate tax rates were between 10 and 20%. Washington's legislature last year increased the exemption, which was great, up to $3 million and returned indexing. That brings today's exemption amount up to $3,076,000. However, not all was good news. Washington also increased the top estate tax rate up to 35%. Taken together with the federal estate tax, that made the combined rate in Washington a whopping 61%. That's a number that will get anyone's attention. The problem was that people started to leave the state, and the legislature noticed. A combined rate of 61% gets a lot of people's attention. And those folks were starting to move, and that caused problems for the legislature. So this year, the legislature looked at that again and they decided to bring the rates back to where they had been, back in that 10 to 20% bracket. That doesn't mean that Washington now has a low estate tax. In fact, we are still the highest estate tax in the country, but it does mean it's a significant reduction from where it had been. And well welcomed relief. In Washington state, because of the estate tax rate, even people who aren't going to be taxed at the federal level need to pay attention. Washington's estate taxes are completely optional. There's plenty of ways to manage them and to continue to remain in Washington. How big of an issue is this for residents of Washington? Well, between 100,000 and 150,000 Washington households would be subject to the Washington estate tax. That's not a small group. What's remarkable about this change is the fact that the change came so soon. Can you imagine if you are a resident of Washington, you're subject to this tax, and you were scrambling last year with that new higher state tax rate? Plus, I can tell you all of the advisors who work in this area were also scrambling. And then, less than a year later, we learned that the state is going to drop that top rate and bring it back down. Why would the legislature do that? I've been scratching my head about that one, trying to figure it out. What it does is it creates a lot of uncertainty for us. And it also shows that the state is trying to find new and creative ways to tax wealth. When you take that move, together with Washington's increase in the capital gains tax up to 9.9% and the new Washington income tax rate of 9.9%, you start to get a clearer picture. Washington is targeting those 100,000 to 150,000 households. They are looking for ways to generate more revenue from the wealthy folks in Washington State. As a planner, you need to start thinking about all of these taxes together, not just independently. I call this the Washington Tax Stack. If you want to see exactly how the numbers work for your specific situation, what just changed, and how to calculate your exposure, I've built a free resource at WashingtonAstateTax.com. All season the guests on the show have talked about money as a tool, not the destination, the vehicle. Emily Griffiths Hamilton talked about four generations of her family using wealth to strengthen the whole family, not just hand things down. Kristen Keffler talked about moving from wealth 1.0, where we just protect the money to wealth 3.0, where we invest in the people. Paul Adams talked about what it really means to leave something behind that matters. That's the right conversation, and I believe it. But here's something I want to be honest about today. The families who live that philosophy already have a foundation underneath them. Someone in that family sat down with an attorney, had an uncomfortable conversation, and built the structure. The philosophy gets to float on top because the scaffolding is already there. For a lot of families listening right now, that scaffolding doesn't exist. Well, let's start at the beginning. 76% of American adults have no will. Not a rough draft, no will at all. And it's getting worse. In 2022, 33% of Americans had one. By 2025, that number had dropped to 24%. Beyond that, only 13% have a living trust, the structure that actually avoids probate and gives you real control. Now, why would it be that 76% of Americans haven't taken that basic step of getting themselves a will? Well, one reason might be that one in four Americans earning over $80,000 a year say they don't have enough assets to bother. They're counting their paycheck. They're not counting home equity, retirement accounts, life insurance. The estate is already there. When do people get around to doing their estate plans? Well, it's when there's an event in their life. It might be that they have a new child being born, or they are now empty nesters, or perhaps they are ready to retire. So it's something that's been on their list and they do feel great relief when they get it done. But 38% of the people who have a plan haven't touched it in more than five years. And here in Washington, that predates the estate tax changes. One of the things we talked about this season was the differences of living on the West Coast versus on the East Coast. It might surprise you, but when people move from one location to another, they often don't get their plans updated. In fact, one in ten people who do have plans had that plan drafted in a state they no longer live in. So in addition to their plans being out of date because they're in a different spot of their life, those may also be out of date because they just don't take into consideration the laws of the state they actually live in. Ever since I was in college, I was really interested in demographics. You can learn a lot from demographics and you can see real trends on what's going to be happening in the future. One of the demographics that has my attention is the amount of wealth that is predicted to be transferring over the next few years. There is estimated to be $2.4 trillion that is expected to pass to millennials and Gen Z. What I would love to know is how many of those dollars are controlled by an up-to-date estate plan. But the other point about this is that is going to be a lot of wealth that is passing to millennials and Gen Z. How are they going to react? How is that going to change their lives? How about the trajectory of their children? As we've learned this season, the answer to that question is yes, it absolutely will. To illustrate what happens when you have a plan that is not quite up to date, I'd like to share a story of a client of mine. But this is a situation I've seen versions of more than once. They came in with what looked like some solid planning, good documents, a Q-tip trust, some restricted family stock, and it was done by an attorney they trusted who did good work for them at the time. But that time was a different era. Washington's exemption had changed since then. The estate had grown in ways nobody anticipated. Federal portability, the rule that allows a surviving spouse to use their deceased spouse's unused federal exemption, had become permanent law after the documents were drafted. Nobody came back. Nobody flagged it. The result was expensive. Excess Washington estate tax at the second death, a surviving spouse with less flexibility than they should have had, GST exemption used in ways that no longer made sense given where the law had moved. It wasn't negligence. It wasn't a bad plan. It was a plan that stopped being maintained. And that's what I keep seeing. People who did the right thing once and then got off the cycle. I mentioned earlier Washington is now directly targeting wealth when you take into consideration the trifecta of taxes. However, thinking that another state might be the option or that your state won't increase taxes in the same way may be naive. We need to be on a defensive footing. States across the country are seeking to raise revenue and looking for ways to do it. California, for example, has actually enacted a wealth tax that they're aiming specifically at billionaires. But it could easily be adjusted down. Other states are also looking at ways that they can increase their revenue. But why? One of the reasons is because the benefits that they are providing continue to increase. Here's what all of that means to you. The tools that used to feel optional, the trust, the updated plan, the review you've been putting off, are not optional anymore. Not in Washington and not in any state. Not for families in the three to five million dollar window. This is what I mean when I say estate planning is really asset protection. Not hiding anything, not avoiding your obligations, protecting what your family has built long enough for it to actually do what you want it to do. I want to come back to something. The very first episode of this show was a conversation with my dad. We talked about a property on Flathead Lake in Montana that's been in our family for over a hundred years. My dad is one of seven siblings. He's an officer in the family corporation that holds the land. And we talked about the weight of that, what it means to be the generation that's responsible for it, the quiet fear of being the ones who let something slip. I've thought about that conversation a lot since we recorded it. After that episode, something shifted for me. I started getting more involved in my own parents' planning, not just advising, actually participating, talking to my siblings, talking with my parents, starting to build some structure for what the next generation is going to need. Not for what already exists, but for what I hope we're building together. And I want to be honest with you, it's not resolved. The future of the lake property is genuinely uncertain. Not everyone in my dad's family sees it the same way I do. There are conversations that haven't happened yet. Some that probably won't happen. There's real disagreement about what it should look like going forward. We started anyway, and that's the whole point. You don't wait for consensus. You don't wait for the perfect legislative environment or the right time in the market. You don't wait until your estate is large enough to feel like it matters. Because by the time it feels like it matters, you've already lost years you can't get back. A right size estate plan for a 35-year-old looks completely different from what a 55-year-old needs 10 years from retirement. Both of them matter. The 35-year-old who starts now has an enormous advantage that has nothing to do with how much money they have. That's what democratizing estate planning actually looks like to me. It's not a one-time transaction for people who've already arrived. It's a living practice built over time. Started where you are with what you have. So, what can you do with all this? Three things. First, if your plan is more than three to five years old, get a review. I cannot tell you how often I see documents that no longer do what people think they do. Laws changed. Life changed. The plan didn't. Second, if your net worth is between 3 million and 15 million in Washington, you have state estate tax exposure that the federal exemption doesn't touch. That gap is real and it's not going to go away after July 1st. Third, if you don't have a plan at all, start. Right sized for where you are today. Don't let perfect be the enemy of good. I mentioned earlier that I had started a free resource called WashingtonEstateTax.com. That's where the full picture lives on these taxes. There's a calculator, the breakdown of Washington's tax stack, what was just changed, and what it means for families like yours. Thank you again for joining us this season. It has been fantastic. Season two is coming this fall, and I'll tell you what's changing. This season was philosophy first, the hundred-year thinking, the family wealth story, the human side of legacy. All of that was real and it was the right place to start. But season two gets more specific. More Washington, more situational, the business sale, the inheritance you didn't expect, the conversation with your aging parents that you keep putting off. I built this show for the person who thinks planning is for someone with more money, more complexity, more of a reason. I want you to come back. Not because I told you to, but because somewhere in this episode, something clicked. Because you want a hundred year family wealth story for your family. Because you got curious about what's possible. Thank you for a remarkable season one.