Governor Ferguson Signs Estate Tax Rollback
Governor Jay Inslee signed SB 6347 into law, rolling back Washington's estate tax rate from the current top rate of 35% to 20% effective July 1, 2026. This is the first significant reduction in Washington's estate tax since the state adopted the tax in 2005 and represents a meaningful win for high-net-worth individuals and business owners in the state.
What SB 6347 Actually Does: The Rate Schedule Change
To understand the impact of SB 6347, you need to understand Washington's current estate tax structure. Washington's estate tax applies to the estates of residents with taxable estates exceeding certain thresholds. The tax is progressive—higher-value estates pay higher effective tax rates.
The current estate tax rates (before SB 6347) range from 10% to 35% depending on the taxable estate value. The tax brackets are:
- 10% on the first $2.25 million above the exemption
- Rates escalate as the estate grows
- 35% on taxable estates exceeding certain thresholds
SB 6347 reduces these rates significantly. The new rate schedule, effective July 1, 2026, reduces the top rate from 35% to 20%. The new brackets are:
- Taxable estates below the exemption: 0% tax
- Rates now escalate to a maximum of 20%
- The exemption threshold itself remains unchanged ($2.193 million for 2026, indexed annually for inflation)
This is a substantial reduction. For a $10 million estate, the difference between 35% and 20% estate tax is $1.5 million—a significant savings. For founders and business owners, this translates directly to more wealth passing to heirs.
The History of Washington's Estate Tax Rate Increases
To understand why this rollback matters, it's helpful to know Washington's estate tax timeline:
2005: Washington adopts an estate tax with a top rate of 19.75%, closely mirroring the federal estate tax that existed at that time. The exemption threshold also matched federal law.
2008-2013: The federal government temporarily eliminated the federal estate tax (as part of the Bush-era tax cuts), but Washington maintained its own estate tax. The mismatch between Washington and federal law created planning complexity for Washington residents.
2013: As the federal estate tax exemption increased (first to $5 million, then higher), Washington's exemption remains fixed or increases more slowly, creating a divergence.
2015-2019: Washington increases its estate tax rates incrementally. The top rate gradually increases from 19.75% to 35%, with new brackets added to hit more estates. This was part of broader Washington revenue-raising efforts.
2022-2025: Continued pressure from business groups and wealthy individuals to reduce or eliminate the estate tax, citing competitiveness concerns relative to neighboring states (Oregon has no estate tax, Idaho and Montana have minimal estate tax).
2026: SB 6347 passes and rolls back the top rate to 20%, a significant reduction from the recent 35% peak.
How Washington's Estate Tax Actually Works
For readers unfamiliar with estate tax mechanics, here's the essential framework:
Who pays it: An estate tax is owed by the estate of a Washington resident when they die. The executor or administrator of the estate is responsible for calculating, reporting, and paying the tax before distributing assets to heirs. Out-of-state residents who own real property in Washington may also owe estate tax on that property.
The exemption: Washington provides an exemption amount ($2.193 million in 2026, adjusted annually for inflation). Only the value of the estate exceeding the exemption is subject to tax. An estate worth $3 million would have $807,000 in taxable estate ($3 million minus the $2.193 million exemption), not the full $3 million.
Graduated rates: Like income tax, estate tax uses graduated rates. You don't pay 20% on the entire taxable estate; you pay 10% on the first bracket, then higher percentages on higher brackets, up to 20% on the highest bracket.
What's included: An estate includes all property you own at death—real estate, bank accounts, investments, retirement accounts (with some exceptions), life insurance proceeds, and business interests. It also includes certain gifts made within three years of death in some cases. The value is generally the fair market value on the date of death.
What's excluded: Property passing to a surviving spouse (with some limitations), charitable gifts, and certain transfers to specific trusts can be excluded or deducted. A surviving spouse can use the unused portion of the deceased spouse's exemption, effectively doubling the combined family exemption.
Why the Rollback Happened: Politics and Revenue Concerns
The timing of SB 6347 reflects several convergent factors:
Political shifting: Washington's legislature has become more concerned with business competitiveness and wealth retention. The state competes with neighboring states and other jurisdictions for wealthy residents and entrepreneurs. An extremely high estate tax can motivate relocation.
Revenue concerns: While estate tax revenue was projected to increase as the rates rose, actual collections have been modest—roughly $300-400 million annually. This is small relative to Washington's overall budget, but the political battle over the tax has been significant. Reducing rates while maintaining the tax itself is a political compromise: progressives keep the tax in place, but business-aligned legislators achieve rate relief.
Federal dynamics: The federal estate tax exemption is set to decline significantly after 2025 (from the current $13.61 million to roughly $7 million). This means federal estate tax will affect more taxpayers, making Washington's estate tax a "double hit" for some. Reducing the state rate addresses this concern.
Business owner pressure: Founders with illiquid business interests in Washington have been among the most vocal critics of the high estate tax. An estate tax of 35% on an illiquid business can force the sale of the business or a partial sale to pay the tax bill. The rollback to 20% reduces this pressure, though it doesn't eliminate it.
How Washington's Estate Tax Compares to Other States
Washington's estate tax, even at the reduced 20% rate, is now more favorable than it was but remains in the middle range nationally:
- No estate tax: Most states, including Oregon, Idaho, Montana, California, and Texas, have no state estate tax. This is a major advantage for wealthy individuals in those states.
- Lower rates: A few states (Massachusetts, Connecticut, Illinois) have modest estate taxes with rates in the 10-16% range.
- Higher rates: Some states (Vermont, Maine, New Hampshire) have estate taxes with top rates around 16-18%.
- Washington at 20%: After the rollback, Washington's 20% top rate is higher than most states with an estate tax but significantly better than the pre-rollback 35% rate.
For context: a founder with a $50 million business in Washington will owe roughly $9.75 million in state estate tax (on $47.8 million of taxable estate above the exemption, taxed at an effective rate around 20.4%). The same founder in Oregon owes zero state estate tax.
Practical Planning Implications for High-Net-Worth Individuals
The estate tax rollback changes planning calculations for Washington residents, but it doesn't eliminate the need for estate planning. Here's what matters:
The exemption is still the most powerful tool: Using your exemption—through trusts, strategic gifting, or spousal portability—is the first priority. If you can keep your taxable estate below the exemption ($2.193 million), estate tax is zero regardless of the rates.
For larger estates, the math has improved but still matters: An estate that would have owed $3.5 million at a 35% rate now owes $2 million at 20%. That's real money, worth planning for.
Liquidity is still a concern: Even at 20%, an estate tax bill requires cash or liquid assets to pay. An illiquid founder with all wealth in private equity still faces the same liquidity challenge; the tax amount is just smaller.
Strategies for Founders with Large Equity Positions
For founders whose net worth is concentrated in private company shares, several strategies can reduce or defer estate tax:
Life insurance: A life insurance policy with a death benefit equal to the projected estate tax bill provides tax-free money (to the estate or an insurance trust) to pay the tax. This is commonly used by founders who want heirs to keep the business rather than forcing a sale to pay taxes.
Charitable giving: Gifts to qualified charitable organizations can be deducted from the taxable estate, reducing the tax liability dollar-for-dollar. A founder who cares about philanthropy can use charitable vehicles (donor-advised funds, charitable remainder trusts) to reduce estate tax while supporting causes they care about.
Intentional gifting strategy: The exemption ($2.193 million) can be used during life through gifts or through a trust-based structure. Founders with businesses likely to appreciate significantly can gift equity now at a lower value, and the future appreciation escapes the estate. With proper structuring (family limited partnerships, intentionally defective grantor trusts), this can be tax-efficient.
Spousal portability: If married, the surviving spouse can use the deceased spouse's unused exemption. This effectively doubles the exemption to $4.386 million for a married couple, reducing estate tax substantially for most estates.
Business succession planning: If the business will continue after your death (perhaps run by co-founders, children, or a management team), the value of the business at your death is what matters for estate tax. Structures that allow the business to be valued at a discount to its actual value (such as family limited partnerships for a business with passive investors) can reduce the taxable value and thus the tax bill.
Section 754 elections: For businesses structured as LLCs or partnerships, a Section 754 election allows the remaining owners to step up the basis of their interests at your death, which can save substantial income tax on future sales. This doesn't reduce estate tax but improves the after-tax results for heirs.
Interaction with Federal Estate Tax
Washington residents must also consider federal estate tax. The federal exemption is currently $13.61 million per person ($27.22 million for married couples), but this exemption is set to decline on January 1, 2026 (not 2025 as originally scheduled, due to a recent technical correction) to approximately $7 million per person.
After that date, an estate of $10 million would owe federal estate tax on $3 million, plus Washington estate tax on the full amount above the Washington exemption. Planning to coordinate both taxes—using gifting strategies, insurance, and trust structures—is essential for founders with significant wealth.
The federal and state taxes don't interact directly (you don't pay state tax on the amount you paid federal tax), but they both apply to the same assets, so careful planning is necessary.
What You Should Do Now
If you have significant wealth in Washington and no current estate plan, or if your plan is outdated, now is the time to review with an estate planning attorney. The reduced rate is positive, but it's not a reason to delay planning. Here's what to consider:
- Get your estate valued: You need to know your current net worth to understand whether estate tax is a concern.
- Review or create an estate plan: A basic will and revocable trust should be the minimum. High-net-worth individuals should consider whether irrevocable trusts, charitable vehicles, or business succession structures make sense.
- Coordinate with business structure: How is your company structured (C corp, S corp, LLC, partnership)? Some structures are more estate-tax-efficient than others.
- Use your exemption strategically: If married, consider whether portability is enough or whether additional trust-based planning makes sense.
- Plan for liquidity: If your estate will be illiquid, consider life insurance or other mechanisms to provide tax-payment cash.
The rollback to 20% makes estate tax somewhat more palatable, but it remains a significant cost of death in Washington. Proper planning can reduce or eliminate this burden for heirs.
Keep Reading
- Washington's New Income Tax: The Complete Guide for Founders, Investors, and High Earners
- Stock Option Exercise Timing: Planning Before Washington's 2028 Income Tax
- ING Trusts Won't Save You from Washington's Income Tax. Here's What Might.
- The Washington Supreme Court Just Fast-Tracked the Income Tax Referendum Case. Here's What It Means.
