How to Avoid Washington State Estate Tax

The State of Washington has one of the most unfavorable estate tax laws. Once a decedent’s estate value is above $3 million, it becomes automatically liable for a 10 – 35% Washington estate tax, which is a huge loss to the heirs.

However, with proper estate planning, one can avoid Washington state estate taxes using strategies like bypass trusts, family limited partnerships, and lifetime gifting. Additionally, you can also defer and eventually cancel capital gains taxes on all your Washington real estate properties through 1031 exchanges.

Universal Pacific 1031 Exchange has 30+ years of professional experience helping real estate investors defer capital gains taxes through our renowned Qualified Intermediaries services. The result is more capital for more strategic investments. Schedule a free consultation with us; let’s discuss how you can start your 1031 exchange and defer taxes on your estate.

In this article, we’ll explain what the Washington estate tax is all about and the best ways you can avoid, reduce, or defer these tax burdens on your real property. It also covers how to ensure that your legacy is transferred to your loved ones exactly how you intend it to be done. 

What Is the Estate Tax in Washington State? 

The State of Washington imposed an estate tax on the assets and real estate of a deceased before its distribution. Often referred to as the “death tax,” this tax generally applies to estates that exceed a certain value threshold.

The tax is calculated based on the fair market value of the deceased’s assets at the time of death and must be paid before distributing the estate in accordance with the will. As of 2026, the federal estate tax exemption is $15 million per individual ($30 million for married couples), permanently increased from $13.99 million in 2025 under the One Big Beautiful Bill Act signed on July 4, 2025. Estates below that amount are not subject to federal estate tax.

In contrast, the Washington State estate tax exemption is significantly lower, with a threshold of $3 million. The tax rates range from 10% – 35%, depending on the estate’s value, as set under RCW 83.100. Consequently, an individual’s estate will be required to file a Washington estate tax return if its gross value exceeds $3 million. The tax rates range from 10 – 35%, depending on the estate’s value. For deaths occurring in 2024 and before July 1, 2025, the threshold was $2.193 million at the rate of 10 – 20%. The increase to $3 million was enacted through Senate Bill 5813, effective July 1, 2025.

From 2026, this threshold will be adjusted annually based on inflation under the provisions of SB 5813. Before calculating estate tax, the decedent’s funeral expenses, marital deductions, and debts must be subtracted from the gross estate. Also, note that estate tax is not the same as inheritance tax. In fact, the US Federal Government and the State of Washington do not impose inheritance tax on heirs.

Who Is Affected by the Washington Estate Tax?

The Washington Estate Tax affects both residents and non-residents whose estate gross value exceeds the state’s exemption amount of $3 million. Upon demise, the state typically analyzes a resident’s real estate, investment portfolios, bank accounts, and other assets and taxes the estate if the value exceeds the $3 million threshold.

Non-residents are only affected if they have tangible assets, such as real estate or physical properties that are domiciled within the state. Intangible assets such as stocks and bonds are not subject to Washington’s estate tax unless the non-resident’s home state does not reciprocate the same exemption rule for Washington residents. 

How Does an Estate Tax Marital Deduction Work?

The marital deduction under IRC Section 2056 allows an individual to transfer an unlimited amount of estate assets to their surviving spouse without paying any tax.This means that when the first spouse passes, the entire estate or portion of it can be transferred to the second spouse, as stipulated in the deceased’s last will or trust.

This transfer is 100% tax-free as long as the receiving spouse is a US citizen. However, the estate may become taxable when the second spouse dies and the gross estate surpasses the exclusion amount.

How to Avoid Washington State Estate Tax

There are several ways most estates avoid Washington State estate taxes legally. It stems from strategic planning down to proper execution. These are a few options to consider:

1. Lifetime Gifting

Washington State does not impose a gift tax, making lifetime gifting a powerful strategy for transferring assets to your loved ones without incurring any tax burdens. However, there is a federal limit on the amount you can send out as gifts in a year. 

An individual can give up to $19,000 per recipient per year to an unlimited number of recipients without triggering any gift tax filing requirement.Exceeding this figure would require you to report the gift on the IRS Form 709. The excess would also impact your lifetime estate tax exemption of $13.99 million.

For instance, suppose a Washington resident gifts his son $500,000 in a year. The excess amount above the threshold is $500,000 – $19,000, which is $481,000. The tax consequences at the federal level are as follows:

• The gift must be reported using the IRS Form 709.
• The $481,000 will be deducted from the person’s federal lifetime gift and estate tax exemption of $15,000,000 (for 2026). Hence, when the individual eventually dies, the remaining exempted amount becomes $15,000,000 – $481,000 = $14,519,000.

For each money or asset given out exceeding the $19,000 annual limit, the individual loses a portion of their federal estate tax exemption. Once the $15 million lifetime exemption is exceeded (for 2026), every additional gift will attract a federal gift tax of 40%. However, gifts don’t have any state-level tax implications.

2. Use of Portability (Federal vs. Washington)

Portability is a tax rule that allows the transfer of unused estate tax exemption of a decedent to the surviving spouse. That means if a deceased spouse has an unused federal estate tax exemption of $15 million (for 2026), it can be transferred to the surviving spouse’s estate via a portability election on IRS Form 706. Since the second spouse also has a $15 million federal exemption, their combined total exemption becomes $30 million.

To do this, the executor of the taxable estate must file the US estate tax return, IRS Form 706, within nine months of the person’s death. A 6-month extension may be requested by filing Form 4768 before the original deadline. Failure to do so means that the deceased spouse’s unused federal tax exemption will be lost. While the federal estate law allows this crossover, Washington State does not allow the portability of one spouse’s estate tax exemption to another.

Consequently, Washington residents can only use this strategy to defer federal estate taxes, but may have to explore other strategies for state taxes. One notable strategy used to maximize a person’s state and federal exemption before death is a credit shelter trust.

3. Credit Shelter Trusts (Bypass Trusts)

The credit shelter trust helps married couples take advantage of their individual state estate exemptions to minimize the taxable value of their assets. This is a great strategy used in states like Washington that doesn’t support portability.

Suppose an individual who owns an estate worth $5 million dies. The entire estate may be transferred to the surviving spouse tax-free under the marital deduction rule. However, when the second spouse dies, the total estate will become taxable since it exceeds the $3 million state threshold.

In a case where the first spouse doesn’t have a surviving spouse, the beneficiaries of the estate will immediately lose a large chunk of the inheritance to tax. So instead of transferring the entire taxable estate to the surviving spouse or other beneficiaries, a bypass trust could be set up to shelter the sum equal to or less than the Washington estate tax exemption threshold—$3 million.

Only the remaining $2 million from the $5 million may be taxable. The spouse or beneficiaries will benefit from the credit shelter trust as stipulated in the decedent’s will, but will not bear any estate tax burden. 

4. Irrevocable Life Insurance Trusts (ILITs)

An irrevocable life insurance trust is a structure designed to own and manage a life insurance policy with the aim of avoiding estate tax. This is a common setup in Washington State, where life insurance benefits are taxed as part of an individual’s gross estate.

The way it works is that the irrevocable trust will purchase the insurance policy on behalf of the individual. Alternatively, an existing life insurance policy may be transferred to the trust. Either way, it has to be properly structured with the help of a financial advisor or tax professional to avoid taxable mistakes.

When the individual dies, the irrevocable trust will send the appropriate benefits to the beneficiaries tax-free. Note that an irrevocable life insurance trust is completely different from a revocable living trust (RLT). You cannot use an RLT to avoid or reduce taxes.

5. Family Limited Partnerships (FLPs) or LLCs

Family Limited Partnerships or Limited Liability Companies (LLCs) are legal structures you can use to distribute your estate and assets among family members through partnership shares or business interests. This way, your assets will no longer be considered to be fully under your estate since ownership has been divided, reducing your tax value. 

Only your portion of the company or partnership will be included in your Washington taxable estate. In a typical family limited partnership, the parents are general partners, controlling the investment, while the children or heirs are limited partners with no control but ownership interest.

The LLC helps protect family assets in cases of a divorce or lawsuit and keeps you in charge of the assets, but not under your taxable estate. For the best result, consult an estate planning attorney before setting up these structures.

How to Defer Washington State Estate Tax Through 1031 Exchange

1031 exchange has been a long-standing, powerful strategy used to defer and eventually cancel capital gains tax when an individual dies. This is even more relevant in Washington, where there are no state-level income taxes.

Basically, a 1031 tax-deferred exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale of a relinquished property into one or more replacement properties. This can be done as many times as you want, empowering you to build generational wealth without worrying about immediate taxation.

A tax deferral doesn’t mean a write-off or outright cancellation. But when the individual dies, the real estate can be transferred to the heirs on a step-up basis, which means a total cancellation of all capital gains taxes owed. However, it’s noteworthy that the estate may still be taxable if its total value exceeds the exemption threshold.

Likewise, this strategy does not defer Real Estate Excise Taxes (REETs). It is advisable to employ the services of a renowned Qualified Intermediary who would handle your 1031 exchange tax deferral in Washington to ensure you comply with all IRS rules and state requirements to avoid unnecessary tax liability.

Who Qualifies for a 1031 Exchange in Washington State?

Anyone who owns a real estate property held primarily for commercial or investment purposes may qualify for a 1031 exchange as long as they adhere to the IRS requirements. The IRS rule states that both relinquished and replacement properties must be like-kind and all exchange timelines (45 days identification and 180 days exchange period) must be honored.

In addition, the titles on all properties concerned must be the same, in accordance with the “same taxpayer rule.” Once the exchange is completed, you must file Form 8824, notifying the IRS about the transaction.

In compliance with the local rules, you must pay the Washington Real Estate Excise Tax for every real estate property you sell. Finally, you cannot conduct a 1031 exchange without a Qualified Intermediary. Hence, hire one with practical experience in the Washington State real estate market.

When to Consider a 1031 Exchange in Washington 

1031 exchanges are primarily done for tax purposes. As such, you should consider a 1031 exchange in Washington when you wish to defer capital gains tax during real estate transactions. You should also use this strategy when you want to sell an investment property and reinvest the proceeds into a new property, plan a retirement, consolidate your properties, or relocate your real estate portfolio into another market.

Want to Defer Washington Estate Taxes?

So far, we’ve shared practical steps to avoiding Washington estate taxes. From lifetime charitable giving and irrevocable life insurance trust to marital deductions and family-limited partnerships, you can easily reduce taxes or completely avoid them.

However, none of these strategies will help you avoid an estate’s capital gains tax when the owner dies. This is where 1031 exchanges come in. With strategic planning, you can comfortably defer and eventually cancel your estate’s capital gains tax without looking over your shoulders for the IRS.

At Universal Pacific 1031 Exchange, we have the best Qualified Intermediaries in Washington who can help you defer this tax and build generational wealth. Visit our 1031 exchange office or book a free one-on-one consultation with our experts to start an exchange.

Accuracy & Sources Disclaimer

The information in this article is sourced from official government publications and is accurate to the best of our knowledge as of the last update on March 18, 2026. All claims can be independently verified through the sources listed below:

Federal Sources:

• 26 U.S.C. § 1031 — Like-Kind Exchanges
• 26 U.S.C. § 2010 — Unified Credit Against Estate Tax
• 26 U.S.C. § 2056 — Marital Deduction
• IRS — Estate Tax Overview
• IRS — Frequently Asked Questions on Gift Taxes
• IRS Like-Kind Exchanges Under IRC Section 1031
• IRS Topic No. 701 — Sale of Your Home
• IRS Form 706 — United States Estate Tax Return
• IRS Form 709 — United States Gift Tax Return
• IRS Form 4768 — Extension of Time to File Estate Tax Return
• IRS Form 8824 — Like-Kind Exchanges
• IRS Tax Year 2026 Inflation Adjustments (OBBBA)
• The One Big Beautiful Bill Act — White House

Washington State Sources:

• RCW 83.100 — Washington Estate Tax Statute
• Senate Bill 5813 (2025) — Estate Tax Amendments
• Washington DOR — Estate Tax
• Washington DOR — Real Estate Excise Tax (REET)

Tax laws are subject to change at both the federal and state level. This content is for informational purposes only and does not constitute tax, legal, or investment advice.

FAQs

Can a 1031 Exchange Help Avoid Estate Tax in Washington?

No, you can not use a 1031 exchange to avoid or reduce estate taxes in Washington. It is used to defer federal capital gains tax when buying or selling like-kind investment properties.

Is There a Limit to How Many 1031 exchanges I Can Do?

No, there is no limit to the number of 1031 exchanges you can do or how many properties you can purchase through this process. However, all exchanges must follow strict IRS rules and all state requirements, such as the use of a Qualified Intermediary.

What Assets Are Included in Washington State Estate Tax?

The assets included in a Washington State Estate Tax are cash, bank accounts, trust assets, tangible personal properties (artwork, collectibles, and jewelry), and real estate. It also includes life insurance proceeds and retirement benefits.

How to Avoid Paying Capital Gains Tax on Inherited Property Near Washington?

Washington State does not charge capital gains tax on inherited property. However, these are ways to avoid paying capital gains tax on inherited properties:

• Sell as soon as you inherit the property. This helps you leverage the step-up basis of its fair market value at the time of the individual’s death. 
• Convert the inherited property to a primary residence and live in it for at least two years to qualify for up to $250,000 ($500,000 for married couples) capital gains tax exclusion.
• Use a 1031 exchange to defer capital gains tax by reinvesting sale proceeds into another investment property.