WA Estate Tax Apportionment and Expense Allocations

The Taxes and Expenses Article in Agile EP establishes the default rules governing how debts, administration expenses, and estate taxes are handled at death in Washington estate plans. This includes the apportionment of federal estate tax and Washington estate tax, as well as the allocation of debts and administration expenses.

Because Washington imposes a separate estate tax with a significantly lower exemption than the federal system, estate tax apportionment analysis is often relevant even when no federal estate tax is due.

Why Tax Apportionment Requires Careful Review

Agile EP's taxes and expenses provisions create a structural default. They are not exhaustive and do not reflect every possible method of estate tax apportionment or expense allocation. Each client's plan must be reviewed in light of the client’s asset structure, beneficiary design, marital status, and tax exposure.

The issue is not whether estate tax is owed. The issue is who pays it.

Estate tax apportionment may produce unintended economic consequences when:

• A significant proportion of wealth is held in retirement accounts or beneficiary-designated assets.

• The residuary beneficiaries differ from non-probate beneficiaries.

• There is a blended family.

• Probate assets pass to a spouse, but retirement assets pass to children.

• The residue includes charitable beneficiaries.

• The probate estate lacks liquidity.

• State estate tax apportionment statutes interact differently with federal recovery provisions.

In these circumstances, the tax burden can shift dramatically from one beneficiary class to another, undermining dispositive intent.  

This article explains how Agile EP's default taxes and expenses provisions work.

Application to Trust-Based Plans

The provisions described in this article apply to both:

• Will-based estate plans, and

• Trust-based estate plans (whether using a joint revocable trust or separate revocable trusts).

The substantive tax apportionment analysis remains the same in either structure. The difference lies in where the applicable allocation provisions appear and which fiduciary is responsible for implementation.

In a trust-based plan:

• The controlling provisions appear in the trust agreement.

• The Trustee (and not the Personal Representative) is the primary fiduciary responsible for tax allocation and payment.

• The pour-over Will directs the Personal Representative to coordinate with and defer to the Trustee.

• Probate assets passing via pour-over are administered consistently with the Trust’s tax clause.

First Death Allocation for Married and Unmarried Couples

In plans using marital deduction planning, tax apportionment and expense allocation operate differently at the first death. This structure preserves the marital deduction and maximizes use of the deceased spouse’s exemption. 

Estate Taxes at the First Death

If estate tax is due at the first death (uncommon federally but possible under Washington law), estate taxes are apportioned to the portion of the estate not elected for the marital deduction.

For Example:

In a Credit Trust structure, estate taxes are paid first from property passing to the Credit Trust. If that share is insufficient, taxes are paid from the residue. This preserves the marital share.

Expense Allocation at the First Death

Expense allocation at the first death is structured around whether an expense will be deducted on the estate tax return. If an estate tax deduction is claimed for a debt or expense, allocating that expense to the marital share does not reduce the marital deduction in net economic terms because the deduction reduces the taxable estate.

For Example:

• If an estate tax deduction is claimed, the expense is allocated first to the residue (typically the marital share), and then to the Credit Trust if necessary.

• If no estate tax deduction will be claimed, the expense is allocated first to the Credit Trust share and then to the residue if necessary.

This sequencing preserves the marital deduction while properly allocating non-deductible expenses.

Unmarried Couples Using Marital-Style Planning

Some unmarried couples structure plans similarly to married couples for dispositive purposes, even using "Credit Trust" nomenclature. If the parties are legally married at the decedent’s death, the first-death estate tax apportionment and expense allocation operate as described above.

If the parties are not legally married at death, no federal or Washington marital deduction is available. In that circumstance:

• Estate taxes are generally apportioned to the residue, subject to certain exceptions discussed below.

• The deductible-versus-non-deductible expense sequencing does not apply.

Agile EP forms include conditional planning in case unmarried partners later marry without updating their documents. 

Default Rule: Taxes and Expenses Paid from the Residuary Estate

Other than the two scenarios described above, The Agile EP tax allocation structure is the same at the death of a single individual, at the second death of a married couple, at the death of each partner when planning as unmarried individuals, and at the second partner’s death when planning in a manner similar to married spouses. In each of these circumstances, the default allocation is described below.

Under Agile EP’s Taxes and Expenses Article, all debts, administration expenses, and "estate taxes" are charged to and paid from the residue of the estate or trust, unless an "Estate Tax Allocation Exception" (as defined in the document), applies.

The term “estate taxes” is specifically defined (in the Definitions Article) to include all federal, state, local and foreign estate, inheritance and other similar taxes and duties imposed by any jurisdiction by reason of the decedent's death.

Estate Tax Allocation Exceptions

Agile EP's Taxes and Expenses Article identify specific "Estate Tax Allocation Exceptions." When one applies, the estate tax attributable to that property is charged to the property generating the inclusion (and can be recovered if necessary).

The "Estate Tax Allocation Exceptions" are:

• Section 2036 Property

Property included in the decedent's gross estate under IRC §2036 (retained life estate or retained income) bears the estate tax attributable to that inclusion.

• Section 2038 Property

Property included in the decedent's gross estate under IRC §2038 (retained power to alter, amend, revoke, or terminate) bears the estate tax attributable to that inclusion.

• Section 2041 Property

Property included in the decedent's gross estate under IRC §2041 related to a general power of appointment bears the estate tax attributable to that inclusion.

• Section 2042 Property

Life insurance included in the decedent's gross estate under IRC §2042 due to retained incidents of ownership bears the estate tax attributable to that inclusion.

• Section 2044 Property

QTIP property included in the decedent's gross estate under IRC §2044 is subject to recovery under IRC §2207A and RCW 83.110A.030 unless recovery is waived in the governing instrument.

• In Agile EP's documents, the Marital Deduction Article contains coordinated language directing that an included QTIP Trust bear the "2207A Tax amount" of federal and/or state estate tax attributable to its inclusion, including appropriate coordination for GST non-exempt portions. The “2207A tax amount” is calculated by comparing the estate tax with and without the QTIP property; the difference is allocated to that property. 

• Disclaimed Property

Any estate taxes resulting from disclaimers are allocated to the disclaimed property.

• GST Taxes

• GST tax imposed under IRC §2603 is payable from the transferred property generating the tax. 
• The default clause also protects property to which GST exemption has been allocated, providing that such property will not bear debts, expenses, or estate taxes unless insufficient other property is available.

Certain Nonprobate Assets Do Not Pay Their Own Tax

Unless captured by an Estate Tax Allocation Exception, the following nonprobate assets generally fo not bear their own estate tax burden or any expenses under the default structure:

• Retirement accounts (IRAs, 401(k)s, etc.)

• Annuities

• Joint tenancy with right of survivorship property

• Transfer-on-death (TOD) accounts

• Payable-on-death (POD) accounts

• Beneficiary-designated brokerage or bank accounts

Although these assets are included in a decedent's gross estate for estate tax purposes, they typically are not included by virtue of IRC §§ 2036, 2038, 2041, or 2042. Therefore, tax attributed to those assets (if included, for example, under IRC §§ 2033 or 2040) is paid from the probate residue.

As a result, residuary beneficiaries effectively subsidize the tax attributable to these types of nonprobate assets. If a client intends for a specific asset (for example, a retirement account or POD account) to bear estate taxes, that result may not be accomplished by the default Agile EP provisions. The document must be manually revised to override the default structure. Absent a modification, the residue bears the tax burden.

Note About Washington State Estate Tax

Despite the referencing to federal estate tax statutes, the Taxes and Expenses Article in Agile EP applies to Washington state estate tax and expressly overrides Washington’s default statutory apportionment scheme. Washington estate tax is imposed on the “Washington taxable estate,” which is based on the federal taxable estate. 

Although RCW 83.110A provides a default pro rata apportionment rule, it applies only unless the governing instrument directs otherwise. The defined term “estate taxes” used in the Taxes and Expenses Article specifically includes state taxes and thus Washington estate tax under an Agile EP plan is governed by the instrument’s tax clause.  

Additionally, RCW 83.110A.030 provides that, unless the governing instrument directs otherwise, estate tax attributable to QTIP property is charged to that property, consistent with the federal recovery structure under IRC § 2207A. The Agile EP documents are drafted consistently with this framework.

Federal Portability Election

In married couple planning and separate from the estate tax allocation provisions, the Agile EP Taxes and Expenses article directs the Personal Representative (or Trustee) to make a timely portability election under IRC §2010(c). The purpose of this election is to transfer the Deceased Spouse’s Unused Exclusion Amount (DSUE) to the surviving spouse. 

Portability essentially reduces the size of the federal taxable estate at the surviving spouse’s later death. It does not alter how estate taxes are apportioned among assets at death. It also does not apply to Washington state estate tax. Costs associated with making the election are specifically identified as proper administration expense of the decedent's estate.

Any descriptions above are high-level summaries of selected provisions. They are provided for general reference only and are not a substitute for reviewing the actual document language. The governing instrument controls in all circumstances.