Washington already had one of the most aggressive estate tax regimes in the country: a $2.193 million exemption (2026), rates from 10% to 20%, and no portability between spouses. ESSB 6346 adds a 9.9% income tax on top of that. The result is a double-tax problem that changes the estate planning calculus for every high-net-worth Washington resident.
The window between now and January 1, 2028 — when the income tax takes effect — is the most valuable planning period. GRATs, gifting, ILITs, and Roth conversions all need to be re-evaluated, and in many cases accelerated.
(For an overview of ESSB 6346, see Washington’s New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know. For the full tax landscape, see Washington State Taxes.)
The Double Tax Problem
Washington now taxes wealth at two points: income during life (9.9% above $1 million) and the estate at death (10–20% above $2.193 million). There is no credit or coordination mechanism between the two taxes.
Consider a founder with $20 million in assets generating $1.5 million in annual income. Each year, $500,000 of income is taxed at 9.9% ($49,500 in Washington income tax). At death, the entire $20 million estate (minus the $2.193 million exemption) is taxed at 10–20%, generating approximately $2.5–3.5 million in Washington estate tax. The income tax reduced the estate during life, but the estate tax doesn’t account for taxes already paid. There’s no income tax deduction on the estate tax return and no estate tax credit on the income tax return.
This double layer makes it more urgent than ever to move assets out of the taxable estate before 2028 — and to convert income-generating assets into forms that minimize annual income tax exposure.
GRATs: Removing Appreciation from the Estate
A Grantor Retained Annuity Trust (GRAT) transfers future appreciation out of your estate while you retain an annuity stream. You contribute assets to the trust, receive annuity payments over a set term, and the remaining value passes to beneficiaries estate-tax-free.
Starting a GRAT before 2028 is particularly valuable because of the income tax interaction. During the GRAT term, the trust is a “grantor trust” for income tax purposes — meaning all trust income is reported on your personal return. Before 2028, that income is subject only to federal tax. After 2028, the same income would also be subject to Washington’s 9.9% tax.
Example: You fund a two-year GRAT in 2026 with $5 million in growth stock. The stock appreciates 15% per year. After the annuity payments, approximately $1.4 million in appreciation passes to your beneficiaries free of estate tax and gift tax. The income generated during 2026–2027 is taxed at federal rates only. If you waited until 2029 to create the same GRAT, the trust income during the term would also be subject to Washington’s 9.9% tax.
The combination of removing appreciation from the estate AND avoiding Washington income tax on the trust income during the pre-2028 window makes GRATs unusually attractive right now.
Accelerated Gifting
Every dollar you give away is a dollar that doesn’t generate Washington income tax in your hands and doesn’t get hit with Washington estate tax at your death.
The 2026 federal gift and estate tax exemption is $13.99 million per person ($27.98 million for married couples). This exemption is scheduled to drop to approximately $7 million per person after 2025 under the TCJA sunset — though Congress may act to extend it. The uncertainty creates urgency: if you have capacity to make large gifts, doing so before the exemption potentially drops and before Washington’s income tax takes effect captures both benefits.
Annual exclusion gifts. The 2026 annual exclusion is $18,000 per recipient ($36,000 for married couples giving jointly). These gifts don’t count against your lifetime exemption. For a family with multiple children and grandchildren, annual exclusion gifts can move significant wealth out of the estate over time.
Lifetime exemption gifts. If you have assets well above the $2.193 million Washington estate tax threshold, making large gifts now — using part or all of your federal exemption — removes those assets from the Washington estate. The income generated by those assets after the gift is also removed from your Washington income tax base, because it’s now the beneficiary’s income.
Irrevocable Life Insurance Trusts (ILITs)
An ILIT holds a life insurance policy outside your taxable estate. When you die, the insurance proceeds pass to the trust beneficiaries free of both estate tax and income tax. The proceeds can be used to pay estate taxes, preserve business interests, or provide liquidity to your heirs.
With Washington’s estate tax rates reaching 20% on large estates, the liquidity need is substantial. A $20 million estate faces approximately $3 million or more in Washington estate tax — due within nine months of death. If the estate consists primarily of illiquid assets (a business, real estate, startup equity), the ILIT provides cash to pay the tax without forcing a fire sale.
Funding the ILIT with annual exclusion gifts ($18,000 per beneficiary using Crummey powers) removes premium payments from your estate without using lifetime exemption. Starting or increasing ILIT funding before 2028 means the premium payments come from pre-Washington-income-tax dollars.
Roth Conversions and Estate Planning
Roth conversions occupy a unique intersection of income tax and estate planning. Converting a traditional IRA to a Roth IRA is a taxable event — the converted amount is included in your federal AGI. But once converted, Roth assets grow tax-free and can be withdrawn tax-free by your heirs.
The pre-2028 advantage: Converting before 2028 means paying federal income tax on the conversion but no Washington income tax. After 2028, the same conversion would be subject to both federal tax and Washington’s 9.9% on amounts above $1 million. A $2 million Roth conversion in 2026 saves approximately $99,000 in Washington tax compared to the same conversion in 2029.
The estate planning angle: Roth assets are still included in your gross estate for estate tax purposes — the conversion doesn’t remove them from the estate. But Roth assets passed to heirs are income-tax-free, which means your heirs don’t pay Washington income tax on distributions. For a beneficiary in a high-tax state, this is a significant advantage.
For a detailed analysis of Roth conversions and Washington’s tax, see Is Retirement Income Subject to Washington’s 9.9% Tax?.
The No-Portability Problem
The federal estate tax allows portability: when the first spouse dies, any unused exemption passes to the surviving spouse. A married couple effectively has $27.98 million in combined exemption, regardless of how assets are titled.
Washington does not. Each spouse gets their own $2.193 million exemption, and there is no portability. If one spouse dies with a $4 million estate, only $2.193 million is exempt — the remaining $1.807 million is taxed. The deceased spouse’s unused exemption vanishes.
This requires bypass trust planning. When the first spouse dies, assets up to the Washington exemption amount should be directed to a bypass trust (also called a credit shelter trust) rather than passing outright to the surviving spouse. The bypass trust preserves the first spouse’s exemption and shields those assets from estate tax at the second death.
Without a bypass trust, a married couple with $8 million in assets could pay Washington estate tax of approximately $380,000 on the first death (if all assets pass outright to the survivor) and then $730,000+ on the second death. With proper planning using bypass trusts, the tax can be reduced by $200,000 or more.
Community Property Considerations
Washington is a community property state. Assets acquired during marriage are generally owned 50/50 by each spouse, regardless of whose name is on the title.
Community property gets a full step-up in basis at the death of either spouse — both halves, not just the deceased spouse’s half. This is a significant advantage over common law states, where only the deceased spouse’s half gets a step-up. For a couple with $10 million in appreciated community property stock (original basis $2 million), the first death steps up the basis of the entire $10 million to fair market value, eliminating $8 million in unrealized gain.
This full step-up interacts with Washington’s income tax in an important way: it eliminates future capital gains tax on the stepped-up property. If the surviving spouse sells the stock after the step-up, there’s no gain — and therefore no Washington income tax or capital gains tax on the sale. This makes community property classification a valuable planning tool.
The Federal Exemption Sunset
The Tax Cuts and Jobs Act doubled the federal estate tax exemption from approximately $5.5 million to $11.18 million (indexed to $13.99 million in 2026). That doubling is scheduled to sunset after 2025, returning the exemption to approximately $7 million.
If the exemption drops, more estates will be subject to federal estate tax in addition to Washington estate tax. A $10 million estate is currently well below the federal threshold but would exceed a $7 million exemption by $3 million — generating approximately $1.2 million in additional federal estate tax.
The combination of a potential federal exemption decrease and Washington’s new income tax creates an extraordinary planning window in 2026–2027. Gifts made now use the high federal exemption, avoid Washington income tax on future income from gifted assets, and remove those assets from the Washington estate. Waiting risks losing on all three fronts.
The Bottom Line
Washington’s income tax adds a second layer to an already aggressive estate tax. The pre-2028 window — roughly 21 months from now — is the optimal time to act. GRATs, accelerated gifting, ILIT funding, and Roth conversions are all more valuable when completed before the income tax takes effect.
The stakes are high: for a $20 million estate, the combined Washington income tax and estate tax over a lifetime can easily exceed $5 million. Proper planning can reduce that substantially — but the window for maximum benefit is closing.
Need to re-evaluate your estate plan in light of Washington’s income tax? Book a 20-minute intro call to discuss your situation. Also see: Washington State Taxes Guide | Income Tax Planning Guide for High Earners
