On October 18, 2012, the Washington State Supreme Court issued a decision regarding the Washington state estate tax consequences of reporting “qualified terminable interest property” (QTIP) on the estate tax return of the second spouse to die. In re Estate of Bracken, 175 Wn.2d 549 (2012). The case 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 first spouse in Bracken died.
In Bracken, the surviving spouse died after the current Washington state estate tax statute was enacted in 2005. The Washington state estate tax return for the surviving spouse 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 surviving spouse’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 surviving spouse’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.
Under Bracken, if a Washington state estate tax return included federal QTIP property from trusts established at a first spouse’s death prior to the 2005 enactment of the current Washington state estate tax, such estate may be entitled to a refund of Washington state estate tax. Because such tax is deductible for federal estate tax purposes, the refund can also result in a larger federal estate tax liability.
The Department of Revenue has reportedly expressed displeasure with the Bracken decision and is encouraging the state Legislature to take action to prevent or limit its application, possibly even retroactively. We strongly recommend that you contact our office as soon as possible if you believe that Bracken may be applicable to an estate or trust of which you are personal representative, trustee or beneficiary.