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Does Washington Owe You an Estate Tax Refund?

Posted Thursday, November 1, 2012 by Michael A. Larson

alt textIn a reversal of lower court decisions, the Washington Supreme Court held that assets held in a qualified terminal interest property (QTIP) trust established prior to May 17, 2005 are not includable in the measure of the Washington Estate Tax, In re Estate of Bracken, Docket Number 84114-4, 10/18/2012. Estates that paid Washington estate tax on the death of the second spouse should review their tax returns to determine if a refund is available.

The case involved two separate estates of wives where a QTIP trust had been established upon the deaths of the husbands. At the time of the husbands’ deaths the only estate tax imposed by Washington was a “pickup” estate tax that was integrated with the federal estate tax. In 2001, federal legislation effected a phase out of the pickup estate tax. In 2005, Washington adopted its own standalone estate tax.

A QTIP trust is a special trust that is set up for the benefit of a surviving spouse and qualifies for the federal marital tax deduction from estate taxes, while allowing the decedent to determine which heirs shall receive the remainder of the trust on the death of the surviving spouse. For federal estate tax purposes if a proper election is made, the assets placed in the trust are not taxed until the death of the second spouse.

The court noted that the Washington estate tax could not be applied to transfers that occurred prior to the effective date of the Washington estate tax. Under Washington law, property is transferred to the income and remainder beneficiaries when it is placed into a trust, even though the remainder beneficiaries may not benefit until the death of the income beneficiary. Thus, the court found that the transfer of the property had occurred prior to the effective date of the Washington estate tax and therefore the transfers were not taxable. The fact that the amounts were included in the estates of the second spouse to die for federal estate tax purposes was not relevant to whether such amounts were taxable for Washington estate tax purposes.

For periods after May 17, 2005, the Washington estate tax provides that estates may make an election to tax the assets placed into QTIP trust on the death of the second spouse. Bracken does not affect the ability of estates to take advantage of this QTIP election.

For more information, contact Ron Bueing at (206) 805-1490.

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