Washington's 2025 Estate Tax Changes

Posted June 17, 2025, By Cole Ferrier

Recent legislative sessions have brought significant reforms to Washington's estate tax laws, creating a new financial landscape for individuals and families across the state. Key changes from two separate bills—one passed in 2024 and another in 2025—will take effect this year, introducing a higher exemption, steeper tax rates, and new spousal inheritance rules. These updates make a review of your estate plan more critical than ever.

The New Washington Estate Tax Law: What's Changed?

Legislation from the 2024 and 2025 sessions has introduced several critical adjustments to the estate tax framework: a higher exemption amount, a revised tax rate structure, a fix for inflation adjustments, and a new rule for the primary residence of a surviving spouse.

1. Increased Estate Tax Exemption to $3 Million

The amount that an individual can pass on to their heirs without incurring state estate tax has been increased from the previous $2.193 million to $3 million. This is a welcome change for many families, as it will shield a larger portion of their assets from taxation.

2. The Inflation Adjustment: A Legislative Fix

A key feature of the new law is the return of annual inflation adjustments, which had been frozen since 2018. The reason for this freeze was a technical but critical issue:

• The Problem: The state law referred to a specific Consumer Price Index (CPI) for the "Seattle-Tacoma-Bremerton" metropolitan area. In 2018, the U.S. Bureau of Labor Statistics stopped publishing this specific index, replacing it with one for the "Seattle-Tacoma-Bellevue" area.

• The Result: Because the law pointed to a non-existent metric, the Department of Revenue could not legally adjust the exemption. It remained stuck at the 2018 level.

• The Solution: ESSB 5813 fixed this by updating the law to reference the correct, currently published CPI. This ensures that beginning in 2026, the $3 million exemption will once again keep pace with economic changes.

3. Higher, More Progressive Tax Rates

While the increased exemption offers relief, it is coupled with a much more aggressive and progressive tax rate schedule for estates that exceed the $3 million mark. The previous rates topped out at 20%; the new rates climb steeply to a top marginal rate of 35%.

Here’s a direct comparison of the old and new rates on the taxable portion of an estate (the amount over the exemption):

Taxable Estate Bracket   - Old   - New - Increase 

$0 to $1,000,000         - 10%   - 10% - No Change

$1,000,001 to $2,000,000 - 14%   - 15% -  +1%

$2,000,001 to $3,000,000 - 15%   - 17% -  +2%

$3,000,001 to $4,000,000 - 16%   - 19% -  +3%

$4,000,001 to $6,000,000 - 18%   - 23% -  +5%

$6,000,001 to $7,000,000 - 19%   - 26% -  +7%

$7,000,001 to $9,000,000 - 19.5% - 30% - +10.5%

Over $9,000,000          - 20%   - 35% - +15%

4. A Note on the Primary Home: The Spousal Personal Residence Exclusion

A significant new provision is the Spousal Personal Residence Exclusion. It is important to note that while most of the changes discussed here were part of the 2025 legislative session (ESSB 5813), this specific provision was established by a separate law (House Bill 1867) passed in 2024, with an effective date of January 1, 2025.

Its function is very specific. It is not a tax deduction but is instead used to determine whether an estate tax return needs to be filed.

• How it Works: For a person passing away on or after January 1, 2025, if their primary home passes to their surviving spouse, the value of that home can be subtracted from the gross estate solely for the purpose of checking against the filing threshold.

• Important Limitation: If the estate's value—even after subtracting the home's value—is still above the $3 million filing threshold, then a return must be filed, and the full value of the estate, including the home, is reported and used for the tax calculation. This provision is designed to reduce the administrative burden on surviving spouses in situations where the family home is the main reason the estate's value is near the threshold.

Example in Action:

An estate is worth $3.6M (separate property plus one half community property), including a $1.6M community property home passing to the spouse.

Calculation: $3.6M (Gross Estate) - $800k (Decedents Share of Home Value) = $2.8M

Result: Since $2.8M is below the $3M threshold, no Washington estate tax return is required.

If the estate were worth $4M, the remainder would be $3.2M ($4M - $800k), and a return would be required, with the full $4M value reported. The Washington Department of Revenue provides several helpful examples of this calculation on its website.

5. Enhanced Family-Owned Business Deduction

The new law also increases the deduction for qualified family-owned business interests to $3 million, providing additional relief for family enterprises.

A Planning Example: The Difference Between Filing and Paying

Let's walk through a common scenario to see how these rules work together.

• The Scenario: A married couple has a total community property estate of $9 million, comprised of a $2 million home and $7 million in investments. The husband passes away. His estate plan directs $3 million of his half of the investments to their children, with the remainder of his estate passing to his wife.

• Step 1: Determine the Gross Estate & Filing Requirement.

  • The husband's gross estate is his half of the community property: $4.5 million.

  • To check the filing requirement, we apply the spousal exclusion: $4,500,000 (Gross Estate) - $1,000,000 (Husband's share of home) = $3,500,000.

  • Since his gross estate of $3.5M is greater than the $3 million filing exemption, a Washington estate tax return must be filed.

• Step 2: Calculate the Taxable Estate. This is where deductions become critical.

  • Gross Estate: $4,500,000

  • Less Marital Deduction (assets passing to the surviving spouse):

    • The husband's entire $4.5M estate, less the $3M passing to the children, leaves $1.5M for the spouse. The marital deduction is $1,500,000.

  • Adjusted Estate: $4,500,000 - $1,500,000 = $3,000,000

• Step 3: Final Tax Calculation.

  • Adjusted Estate: $3,000,000

  • Less Washington Exemption: -$3,000,000

  • The final taxable amount is $0.

  • Washington Estate Tax Due: $0

This example clearly shows that even though the estate was large enough to require a filing, strategic use of the marital deduction resulted in zero tax liability at the first death.

Implications for Your Financial Planning

These legislative changes underscore the critical importance of proactive and strategic financial planning. Here are key areas to consider:

• Review Your Estate Plan: If your current estate plan was designed around the old exemption amount, it is essential to review and potentially revise it.

• Gifting Strategies: This is one of the most powerful planning areas for Washington residents. Unlike the federal system, Washington state does not have a gift tax. The federal government has a unified gift and estate tax system, meaning large gifts you make during your lifetime are tracked and reduce the amount you can pass on tax-free at death. Washington's system is different. Because there is no state-level gift tax, you have an unlimited ability to make lifetime gifts without incurring a Washington tax. For those with estates over the $3 million state exemption, making substantial gifts during your lifetime can reduce the value of your estate below the taxable threshold, potentially eliminating your Washington estate tax liability entirely.

• Strategic Roth Conversions: For estate tax purposes, Washington includes the full value of retirement accounts, whether they are pre-tax (like a traditional IRA/401(k)) or post-tax (like a Roth IRA). This creates a planning opportunity. By converting funds from a traditional IRA to a Roth IRA, you must pay income tax on the converted amount today. While this might seem counterintuitive, the money used to pay that income tax is now removed from your estate. This "pre-payment" of tax shrinks the total value of your estate, which can reduce or even eliminate your future Washington estate tax liability, while also providing tax-free growth and tax-free withdrawals for your heirs.

• Utilize Trusts to Maximize Exemptions: For married couples, a Credit Shelter Trust (or Bypass Trust) is a key tool. It allows you to preserve the individual estate tax exemption for both spouses. By moving assets into a trust upon the first spouse's death, those assets can provide for the survivor while being sheltered from estate tax when the second spouse passes away.

• Life Insurance: For larger estates, life insurance can provide the necessary liquidity to cover the increased estate tax liability, preventing the forced sale of family assets to pay the tax bill.

• Charitable Giving: Strategic charitable planning can not only fulfill your philanthropic goals but also reduce the size of your taxable estate.

Conclusion: A Call for Proactive Planning

The 2025 changes to Washington's estate tax law create a tale of two outcomes. For many, the increased exemption is a welcome relief that will simplify their estate planning. For those with more substantial assets, the higher tax rates present a new challenge that demands careful consideration and strategic action.

Regardless of your net worth, these changes serve as a crucial reminder that estate planning is not a one-time event. It is an ongoing process that must adapt to changes in the law, your financial situation, and your personal goals.

Take Action Today

Failing to adapt to Washington's new estate tax laws comes with a significant financial price. An outdated plan could lead to substantial, unnecessary taxes that reduce the inheritance you leave for your loved ones. To protect your assets and ensure your plan aligns with these new rules, we encourage you to contact us.

Resources

• Washington State Department of Revenue - Estate Tax: https://dor.wa.gov/taxes-rates/other-taxes/estate-tax

• Spousal Personal Residence Exclusion (with examples): https://dor.wa.gov/taxes-rates/other-taxes/estate-tax/estate-tax-spousal-personal-residence-exclusion

• Engrossed Substitute Senate Bill (ESSB) 5813: https://app.leg.wa.gov/billsummary?BillNumber=5813&Year=2025

• House Bill 1867 (Spousal Personal Residence Exclusion): https://app.leg.wa.gov/BillSummary/?BillNumber=1867&Year=2023