Earlier this year, the Washington state legislature made changes to the Washington state estate tax designed to limit the impact of the Bracken decision. The legislature made other changes to the state estate tax, which have been discussed in a previous post.
In re Estate of Bracken, 175 Wn.2d 549 (2012) involved a husband whose Will directed a portion of his estate to a trust for the benefit of his surviving spouse. The trust met the requirements for a federal QTIP election. Those requirements are somewhat complex, but the result is that the property passing to a QTIP trust escapes federal estate tax at the death of the first spouse to die as a result of the unlimited marital deduction, but is subject to federal estate tax at the death of the surviving spouse. The husband died before the current Washington state estate tax statute was enacted in 2005. That statute provides for a state QTIP election. In other words, just like the federal QTIP election, property over which a state QTIP election is made avoids state estate tax at the death of the first spouse, but is subject to state estate tax at the death of the surviving spouse, but no such election was available when the husband in Bracken died. In Bracken, the wife died after the current Washington state estate tax statute was enacted in 2005. The Washington state estate tax return for the wife did not include the value of the federal QTIP trust, because no Washington state QTIP election had been made for such trust. Put differently, the personal representative took the position that because Washington law only subjected state QTIP property to tax, the federal QTIP trust was not included in the wife’s estate for Washington state estate tax purposes.
The Department of Revenue disagreed with this position, arguing that the federal QTIP trust was included in the wife’s estate. However, the Washington State Supreme Court agreed with the personal representative, holding that QTIP trusts created prior to the 2005 enactment of the current Washington state estate tax statute are not subject to Washington state estate tax.
The legislature believed that Bracken would have “adverse fiscal impacts,” and thus enacted a bill specifically defining the “Washington taxable estate” to include federal QTIP property regardless of whether the surviving spouse’s interest in such property was acquired before the 2005 enactment of the current estate tax statute. The legislature also broadened the definition of “transfer” of property at death (to which the state estate tax applies) to include “any shifting upon death of the economic benefit in property or any power or legal privilege incidental to the ownership or enjoyment of property.” The new definitions are effective not only prospectively, but also retroactively to all estates of decedents dying on or after May 17, 2005, the effective date of the current state estate tax statute.