Washington State Estate Taxes
Many thanks to Michael Mashni from Andersen Seattle for his assistance with this blog
Canadians who are not US persons (not US citizens or US domiciles) are subject to US federal estate tax on the value of US situs assets they own on their date of death. US federal estate tax rates range from 18% to 40% of the fair market value of the property, often resulting in a much higher tax liability than Canadian taxation on the unrealized gain at death. Under current US federal estate tax law, individuals with total worldwide estates less than US$14 million are not subject to US federal estate tax.
US situs assets generally include interests in US real property, interests in US trades or businesses including publicly traded shares or bonds in US corporations, certain loans to US persons and tangible property located in the US. The current US$14 million per person exemption limit expires at the end of 2025 with a lower exemption limit of approximately $7 million starting in 2026. A Republican controlled Congress and Presidency will likely keep the US$14 million exemption limit past 2025.
Many Canadians focus on US federal estate tax rates and exemptions but do not consider state estate tax rates. Washington state has an estate tax that applies to Washington resident decedents and non-residents of the state that own property in Washington. While the rate of tax is lower ranging from 10% to 20% of the value of the property, the net worth exemption, at US$2,193,000, is much lower than the US federal tax exemption. As a result, Canadians owning Washington state real property may be exempt from US federal estate tax but subject to Washington Estate Tax.
Take the example of an individual resident in British Columbia that owns a vacation property in Washington state. Assuming their net worth is US$10,000,000 and the property’s value is US$1,000,000, in 2025 they would not be exposed to US federal estate tax if they owned the property on their death since their net worth is less than the US federal estate tax exemption. However, since the Washington estate tax exemption is far lower than their net worth, they would be subject to Washington estate tax of approximately US$125,000 [1] if they owned the Washington property on their death.
Tax strategies exist to handle this issue, ranging from selling before death, life insurance policies, certain types of debt against the property and alternative ownership structures such as limited partnerships or trusts. All have advantages and disadvantages. Where none are used and the individual is subject to Washington state estate tax, the Canada/US Income Tax Treaty may allow the individual may be able to claim a foreign tax credit for the Washington estate tax liability against the Canadian capital gains tax on death. Such credit is generally limited to the Canadian federal income tax, only applicable to the deemed gain at death, on the Washington property itself.
We can assist Canadian families that own Washington state property subject to state estate taxes. Please contact us to discuss further.
[1] US$1,000,000 – ($1,000,000 X ($2,193,000 / $10,000,000) X average Wash Estate Tax rate 16% = US$125,000 (rounded). Washington Admin. Code Sec. 458-57-125
For more information or assistance with compliance planning, please contact our team.
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