Title of Rule and Other Identifying Information: WAC 458-57-105 Nature of estate tax, definitions and 458-57-115 Valuation of property, property subject to estate tax, and how to calculate the tax.

     Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The department is proposing to amend these rules to recognize provisions of SSB 6831 (chapter 11, Laws of 2010). The changes explain that during calendar year 2010, if the federal estate tax terminates and no federal estate tax is in effect for any part of the calendar year, then a will or trust of a decedent who dies during that part of 2010 using a formula clause based on this federal law will be deemed to refer to the federal estate tax and generation-skipping transfer tax as they applied on December 31, 2009, unless decedent clearly manifests a contrary intention.

     Copies of draft rules are available for viewing and printing on our web site at http://dor.wa.gov/content/FindALawOrRule/RuleMaking/agenda.aspx.

     Reasons Supporting Proposal: To recognize 2010 legislation.

     Statutory Authority for Adoption: RCW 82.32.300, 82.01.060(2), and 84.33.096.

     Statute Being Implemented: Chapter 83.100 RCW and SSB 6831 (chapter 11, Laws of 2010).

     Rule is not necessitated by federal law, federal or state court decision.

     Name of Proponent: Department of revenue, governmental.

     Name of Agency Personnel Responsible for Drafting: Mark E. Bohe, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 570-6133; Implementation and Enforcement: Stuart Thronson, 1025 Union Avenue S.E., Suite #100, Olympia, WA, (360) 570-3230.

September 13, 2010

Alan R. Lynn

Rules Coordinator

OTS-3597.1

AMENDATORY SECTION(Amending WSR 09-04-008, filed 1/22/09, effective 2/22/09)

WAC 458-57-105   Nature of estate tax, definitions.   (1) Introduction. This rule applies to deaths occurring on or after May 17, 2005, and describes the nature of Washington state's estate tax as it is imposed by chapter 83.100 RCW (Estate and Transfer Tax Act). It also defines terms that will be used throughout chapter 458-57 WAC (Washington Estate and Transfer Tax Reform Act rules). The estate tax rule on the nature of estate tax and definitions for deaths occurring on or before May 16, 2005, can be found in WAC 458-57-005.

     (2) Nature of Washington's estate tax. The estate tax is neither a property tax nor an inheritance tax. It is a tax imposed on the transfer of the entire taxable estate and not upon any particular legacy, devise, or distributive share.

     (a) Relationship of Washington's estate tax to the federal estate tax. The department administers the estate tax under the legislative enactment of chapter 83.100 RCW, which references the Internal Revenue Code (IRC) as it existed January 1, 2005. Federal estate tax law changes enacted after January 1, 2005, do not apply to the reporting requirements of Washington's estate tax. The department will follow federal Treasury Regulations section 20 (Estate tax regulations), in existence on January 1, 2005, to the extent they do not conflict with the provisions of chapter 83.100 RCW or 458-57 WAC. For deaths occurring January 1, 2009, and after, Washington has different estate tax reporting and filing requirements than the federal government. There will be estates that must file an estate tax return with the state of Washington, even though they are not required to file with the federal government. The Washington state estate and transfer tax return and the instructions for completing the return can be found on the department's web site at http://www.dor.wa.gov/ under the heading titled forms. The return and instructions can also be requested by calling the department's estate tax section at 360-570-3265, option 2.

     (b) Lifetime transfers. Washington estate tax taxes lifetime transfers only to the extent included in the federal gross estate. The state of Washington does not have a gift tax.

     (3) Definitions. The following terms and definitions are applicable throughout chapter 458-57 WAC:

     (a) "Absentee distributee" means any person who is the beneficiary of a will or trust who has not been located;

     (b) "Decedent" means a deceased individual;

     (c) "Department" means the department of revenue, the director of that department, or any employee of the department exercising authority lawfully delegated to him by the director;

     (d) "Escheat" of an estate means that whenever any person dies, whether a resident of this state or not, leaving property in an estate subject to the jurisdiction of this state and without being survived by any person entitled to that same property under the laws of this state, such estate property shall be designated escheat property and shall be subject to the provisions of RCW 11.08.140 through 11.08.300;

     (e) "Federal return" means any tax return required by chapter 11 (Estate tax) of the Internal Revenue Code;

     (f) "Federal tax" means tax under chapter 11 (Estate tax) of the Internal Revenue Code;

     (g) "Federal taxable estate" means the taxable estate as determined under chapter 11 of the Internal Revenue Code without regard to:

     (i) The termination of the federal estate tax under section 2210 of the IRC or any other provision of law; and

     (ii) The deduction for state estate, inheritance, legacy, or succession taxes allowable under section 2058 of the IRC.

     (iii) During calendar year 2010, if the federal estate tax terminates and no federal estate tax is in effect for any part of the calendar year, then a will or trust of a decedent who dies during that part of 2010 using a formula clause which refers to a phrase described in RCW 11.108.XXXX will be deemed to refer to the federal estate tax and generation-skipping transfer tax as they applied on December 31, 2009, unless decedent clearly manifests a contrary intent in the will or trust premised on a permanent repeal (as opposed to temporary repeal) of the federal estate tax or generation-skipping tax. See chapter 11.108 RCW.

     (h) "Gross estate" means "gross estate" as defined and used in section 2031 of the Internal Revenue Code;

     (i) "Internal Revenue Code" or "IRC" means, for purposes of this chapter, the United States Internal Revenue Code of 1986, as amended or renumbered on January 1, 2005;

     (j) "Person" means any individual, estate, trust, receiver, cooperative association, club, corporation, company, firm, partnership, joint venture, syndicate, or other entity and, to the extent permitted by law, any federal, state, or other governmental unit or subdivision or agency, department, or instrumentality thereof;

     (k) "Person required to file the federal return" means any person required to file a return required by chapter 11 of the Internal Revenue Code, such as the personal representative (executor) of an estate;

     (l) "Property," when used in reference to an estate tax transfer, means property included in the gross estate;

     (m) "Resident" means a decedent who was domiciled in Washington at time of death;

     (n) "State return" means the Washington estate tax return required by RCW 83.100.050;

     (o) "Taxpayer" means a person upon whom tax is imposed under this chapter, including an estate or a person liable for tax under RCW 83.100.120;

     (p) "Transfer" means "transfer" as used in section 2001 of the Internal Revenue Code. However, "transfer" does not include a qualified heir disposing of an interest in property qualifying for a deduction under RCW 83.100.046;

     (q) "Washington taxable estate" means the "federal taxable estate":

     (i) Less one million five hundred thousand dollars for decedents dying before January 1, 2006, or two million dollars for decedents dying on or after January 1, 2006;

     (ii) Less the amount of any deduction allowed under RCW 83.100.046 as a farm deduction;

     (iii) Less the amount of the Washington qualified terminable interest property (QTIP) election made under RCW 83.100.047;

     (iv) Plus any amount deducted from the federal estate pursuant to IRC § 2056 (b)(7) (the federal QTIP election);

     (v) Plus the value of any trust (or portion of a trust) of which the decedent was income beneficiary and for which a Washington QTIP election was previously made pursuant to RCW 83.100.047; and

     (vi) Less any amount included in the federal taxable estate pursuant to IRC § 2044 (inclusion of amounts for which a federal QTIP election was previously made) from a predeceased spouse that died on or after May 17, 2005.

[Statutory Authority: RCW 82.32.300 and 82.01.060(2). 09-04-008, § 458-57-105, filed 1/22/09, effective 2/22/09. Statutory Authority: RCW 83.100.047 and 83.100.200. 06-07-051, § 458-57-105, filed 3/9/06, effective 4/9/06.]

OTS-3596.1

AMENDATORY SECTION(Amending WSR 09-04-008, filed 1/22/09, effective 2/22/09)

WAC 458-57-115   Valuation of property, property subject to estate tax, and how to calculate the tax.   (1) Introduction. This rule applies to deaths occurring on or after May 17, 2005, and is intended to help taxpayers prepare their return and pay the correct amount of Washington state estate tax. It explains the necessary steps for determining the tax and provides examples of how the tax is calculated. The estate tax rule on valuation of property etc., for deaths occurring on or before May 16, 2005, can be found in WAC 458-57-015.

     (2) Determining the property subject to Washington's estate tax.

     (a) General valuation information. The value of every item of property in a decedent's gross estate is its date of death fair market value. However, the personal representative may elect to use the alternate valuation method under section 2032 of the Internal Revenue Code (IRC), and in that case the value is the fair market value at that date, including the adjustments prescribed in that section of the IRC. The valuation of certain farm property and closely held business property, properly made for federal estate tax purposes pursuant to an election authorized by section 2032A of the 2005 IRC, is binding on the estate for state estate tax purposes.

     (b) How is the gross estate determined? The first step in determining the value of a decedent's Washington taxable estate is to determine the total value of the gross estate. The value of the gross estate includes the value of all the decedent's tangible and intangible property at the time of death. In addition, the gross estate may include property in which the decedent did not have an interest at the time of death. A decedent's gross estate for estate tax purposes may therefore be different from the same decedent's estate for local probate purposes. Sections 2031 through 2046 of the IRC provide a detailed explanation of how to determine the value of the gross estate.

     (c) Deductions from the gross estate. The value of the taxable estate is determined by subtracting the authorized exemption and deductions from the value of the gross estate. Under various conditions and limitations, deductions are allowable for expenses, indebtedness, taxes, losses, charitable transfers, and transfers to a surviving spouse. While sections 2051 through 2056A of the IRC provide a detailed explanation of how to determine the value of the taxable estate the following areas are of special note:

     (i) Funeral expenses.

     (A) Washington is a community property state and under Estate of Julius C. Lang v. Commissioner, 97 Fed. 2d 867 (9th Cir. 1938) affirming the reasoning of Wittwer v. Pemberton, 188 Wash. 72, 76, 61 P.2d 993 (1936) funeral expenses reported for a married decedent must be halved. Administration expenses are not a community debt and are reported at 100%.

     (B) Example. John, a married man, died in 2005 with an estate valued at $2.5 million. On Schedule J of the federal estate tax return listed following as expenses:

SCHEDULE J - Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims
Item Number	Description		Expense Amount	Total Amount
1	A. Funeral expenses: Burial and services		$4,000
		(1/2 community debt)	($2,000)
		Total funeral expenses. . . . . . . . . . . .		$2,000
	B. Administration expenses:
	1. Executors' commissions - amount estimated/agreed upon paid. (Strike out the words that do not apply.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			$10,000
	2. Attorney fees - amount estimated/agreed upon/paid. (Strike out the words that do not apply.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			$5,000

     The funeral expenses, as a community debt, were properly reported at 50% and the other administration expenses were properly reported at 100%.

     (ii) Mortgages and liens on real property. Real property listed on Schedule A should be reported at its fair market value without deduction of mortgages or liens on the property. Mortgages and liens are reported and deducted using Schedule K.

     (iii) Washington qualified terminable interest property (QTIP) election.

     (A) A personal representative may choose to make a larger or smaller percentage or fractional QTIP election on the Washington return than taken on the federal return in order to reduce Washington estate liability while making full use of the federal unified credit.

     (B) Section 2056 (b)(7) of the IRC states that a QTIP election is irrevocable once made. Section 2044 states that the value of any property for which a deduction was allowed under section 2056 (b)(7) must be included in the gross estate of the recipient. Similarly, a QTIP election made on the Washington return is irrevocable, and a surviving spouse who is the lifetime beneficiary of property for which a Washington QTIP election was made must include the value of the remaining property in his or her gross estate for Washington estate tax purposes. If the value of property for which a federal QTIP election was made is different, this value is not includible in the surviving spouse's gross estate for Washington estate tax purposes; instead, the value of property for which a Washington QTIP election was made is includible.

     (C) The Washington QTIP election must adequately identify the assets, by schedule and item number, included as part of the election, either on the return or, if those assets have not been determined when the estate tax return is filed, on a statement to that effect, prepared when the assets are definitively identified. Identification of the assets is necessary when reviewing the surviving spouse's return, if a return is required to be filed. This statement may be filed with the department at that time or when the surviving spouse's estate tax return is filed.

     (D) Example. A decedent dies in 2009 with a gross estate of $5 million. The decedent established a QTIP trust for the benefit of her surviving spouse in an amount to result in no federal estate tax. The federal unified credit is $3.5 million for the year 2009. In 2009 the Washington statutory deduction is $2 million. To pay no Washington estate tax the personal representative of the estate has the option of electing a larger percentage or fractional QTIP election resulting in the maximization of the individual federal unified credit and paying no tax for Washington purposes.

     The federal estate tax return reflected the QTIP election with a percentage value to pay no federal estate tax. On the Washington return the personal representative elected QTIP treatment on a percentage basis in an amount so no Washington estate tax is due. Upon the surviving spouse's death the assets remaining in the Washington QTIP trust must be included in the surviving spouse's gross estate.

     (iv) Washington qualified domestic trust (QDOT) election.

     (A) A deduction is allowed for property passing to a surviving spouse who is not a U.S. citizen in a qualified domestic trust (a "QDOT"). An executor may elect to treat a trust as a QDOT on the Washington estate tax return even though no QDOT election is made with respect to the trust on the federal return; and also may forgo making an election on the Washington estate tax return to treat a trust as a QDOT even though a QDOT election is made with respect to the trust on the federal return. An election to treat a trust as a QDOT may not be made with respect to a specific portion of an entire trust that otherwise would qualify for the marital deduction, but if the trust is actually severed pursuant to authority granted in the governing instrument or under local law prior to the due date for the election, a QDOT election may be made for any one or more of the severed trusts.

     (B) A QDOT election may be made on the Washington estate tax return with respect to property passing to the surviving spouse in a QDOT, and also with respect to property passing to the surviving spouse if the requirements of IRC section 2056 (d)(2)(B) are satisfied. Unless specifically stated otherwise herein, all provisions of sections 2056(d) and 2056A of the IRC, and the federal regulations promulgated thereunder, are applicable to a Washington QDOT election. Section 2056A(d) of the IRC states that a QDOT election is irrevocable once made. Similarly, a QDOT election made on the Washington estate tax return is irrevocable. For purposes of this subsection, a QDOT means, with respect to any decedent, a trust described in IRC section 2056A(a), provided, however, that if an election is made to treat a trust as a QDOT on the Washington estate tax return but no QDOT election is made with respect to the trust on the federal return:

     (I) The trust must have at least one trustee that is an individual citizen of the United States resident in Washington state, or a corporation formed under the laws of the state of Washington, or a bank as defined in IRC section 581 that is authorized to transact business in, and is transacting business in, the state of Washington (the trustee required under this subsection is referred to herein as the "Washington Trustee");

     (II) The Washington Trustee must have the right to withhold from any distribution from the trust (other than a distribution of income) the Washington QDOT tax imposed on such distribution;

     (III) The trust must be maintained and administered under the laws of the state of Washington; and

     (IV) The trust must meet the additional requirements intended to ensure the collection of the Washington QDOT tax set forth in (c)(iv)(D) of this subsection.

     (C) The QDOT election must adequately identify the assets, by schedule and item number, included as part of the election, either on the return, or, if those assets have not been determined when the estate tax return is filed, or a statement to that effect, prepared when the assets are definitively identified. This statement may be filed with the department at that time or when the first taxable event with respect to the trust is reported to the department.

     (D) In order to qualify as a QDOT, the following requirements regarding collection of the Washington QDOT tax must be satisfied.

     (I) If a QDOT election is made to treat a trust as a QDOT on both the federal and Washington estate tax returns, the Washington QDOT election will be valid so long as the trust satisfies the statutory requirements of Treas. Reg. Section 20.2056A-2(d).

     (II) If an election is made to treat a trust as a QDOT only on the Washington estate tax return, the following rules apply:

     If the fair market value of the trust assets exceeds $2 million as of the date of the decedent's death, or, if applicable, the alternate valuation date, the trust must comply with Treas. Reg. Section 20.2056A-2 (d)(1)(i), except that: If the bank trustee alternative is used, the bank must be a bank that is authorized to transact business in, and is transacting business in, the state of Washington, or a bond or an irrevocable letter of credit meeting the requirements of Treas. Reg. Section 20.2056A-2 (d)(1)(i)(B) or (C) must be furnished to the department.

     If the fair market value of the trust assets is $2 million or less as of the date of the decedent's death, or, if applicable, the alternate valuation date, the trust must comply with Treas. Reg. Section 20.2056A-2 (d)(1)(ii), except that not more than 35 percent of the fair market value of the trust may be comprised of real estate located outside of the state of Washington.

     A taxpayer may request approval of an alternate plan or arrangement to assure the collection of the Washington QDOT tax. If such plan or arrangement is approved by the department, such plan or arrangement will be deemed to meet the requirements of this (c)(iv)(D).

     (E) The Washington estate tax will be imposed on:

     (I) Any distribution before the date of the death of the surviving spouse from a QDOT (except those distributions excepted by IRC section 2056A (b)(3)); and

     (II) The value of the property remaining in the QDOT on the date of the death of the surviving spouse (or the spouse's deemed date of death under IRC section 2056A (b)(4)). The tax is computed using Table W. The tax is due on the date specified in IRC section 2056A (b)(5). The tax shall be reported to the department in a form containing the information that would be required to be included on federal Form 706-QDT with respect to the taxable event, and any other information requested by the department, and the computation of the Washington tax shall be made on a supplemental statement. If Form 706-QDT is required to be filed with the Internal Revenue Service with respect to a taxable event, a copy of such form shall be provided to the department. Neither the residence of the surviving spouse or other QDOT beneficiary nor the situs of the QDOT assets are relevant to the application of the Washington tax. In other words, if Washington state estate tax would have been imposed on property passing to a QDOT at the decedent's date of death but for the deduction allowed by this subsection (c)(iv)(E)(II), the Washington tax will apply to the QDOT at the time of a taxable event as set forth in this subsection (c)(iv)(E)(II) regardless of, for example, whether the distribution is made to a beneficiary who is not a resident of Washington, or whether the surviving spouse was a nonresident of Washington at the date of the surviving spouse's death.

     (F) If the surviving spouse of the decedent becomes a citizen of the United States and complies with the requirements of section 2056A (b)(12) of the IRC, then the Washington tax will not apply to: Any distribution before the date of the death of the surviving spouse from a QDOT; or the value of the property remaining in the QDOT on the date of the death of the surviving spouse (or the spouse's deemed date of death under IRC section 2056A (b)(4)).

     (d) Washington taxable estate. The estate tax is imposed on the "Washington taxable estate." The "Washington taxable estate" means the "federal taxable estate":

     (i) Less one million five hundred thousand dollars for decedents dying before January 1, 2006, or two million dollars for decedents dying on or after January 1, 2006;

     (ii) Less the amount of any deduction allowed under RCW 83.100.046 as a farm deduction;

     (iii) Less the amount of the Washington qualified terminable interest property (QTIP) election made under RCW 83.100.047;

     (iv) Plus any amount deducted from the federal estate pursuant to IRC § 2056 (b)(7) (the federal QTIP election);

     (v) Plus the value of any trust (or portion of a trust) of which the decedent was income beneficiary and for which a Washington QTIP election was previously made pursuant to RCW 83.100.047; and

     (vi) Less any amount included in the federal taxable estate pursuant to IRC § 2044 (inclusion of amounts for which a federal QTIP election was previously made) from a predeceased spouse that died on or after May 17, 2005.

     (e) Federal taxable estate. The "federal taxable estate" means the taxable estate as determined under chapter 11 of the IRC without regard to:

     (i) The termination of the federal estate tax under section 2210 of the IRC or any other provision of law; and

     (ii) The deduction for state estate, inheritance, legacy, or succession taxes allowable under section 2058 of the IRC.

     (iii) During calendar year 2010, if the federal estate tax terminates and no federal estate tax is in effect for any part of the calendar year, then a will or trust of a decedent who dies during that part of 2010 using a formula clause which refers to a phrase described in RCW 11.108.XXXX will be deemed to refer to the federal estate tax and generation-skipping transfer tax as they applied on December 31, 2009, unless decedent clearly manifests a contrary intent in the will or trust premised on a permanent repeal (as opposed to temporary repeal) of the federal estate tax or generation-skipping tax. See chapter 11.108 RCW.

     (3) Calculation of Washington's estate tax.

     (a) The tax is calculated by applying Table W to the Washington taxable estate. See (d) of this subsection for the definition of "Washington taxable estate."

Table W

Washington Taxable Estate is at Least	But Less Than	The Amount of Tax Equals Initial Tax Amount		Plus Tax Rate %	Of Washington Taxable Estate Value Greater Than
$0	$1,000,000	$0		10.00%	$0
$1,000,000	$2,000,000	$100,000		14.00%	$1,000,000
$2000,000	$3,000,000	$240,000		15.00%	$2,000,000
$3,000,000	$4,000,000	$390,000		16.00%	$3,000,000
$4,000,000	$6,000,000	$550,000		17.00%	$4,000,000
$6,000,000	$7,000,000	$890,000		18.00%	$6,000,000
$7,000,000	$9,000,000	$1,070,000		18.50%	$7,000,000
$9,000,000		$1,440,000		19.00%	$9,000,000

     (b) Examples.

     (i) A widow dies on September 25, 2005, leaving a gross estate of $2.1 million. The estate had $100,000 in expenses deductible for federal estate tax purposes. Examples of allowable expenses include funeral expenses, indebtedness, property taxes, and charitable transfers. The Washington taxable estate equals $500,000.

Gross estate	$2,100,000
Less allowable expenses deduction	- $100,000
Less $1,500,000 statutory deduction	- $1,500,000
Washington taxable estate	$500,000

     Based on Table W, the estate tax equals $50,000 ($500,000 x 10% Washington estate tax rate).

     (ii) John dies on October 13, 2005, with an estate valued at $3 million. John left $1.5 million to his spouse, Jane, using the unlimited marital deduction. There is no Washington estate tax due on John's estate.

Gross estate	$3,000,000
Less unlimited marital deduction	- $1,500,000
Less $1,500,000 statutory deduction	- $1,500,000
Washington taxable estate	$0

     Although Washington estate tax is not due, the estate is still required to file a Washington estate tax return along with a photocopy of the filed and signed federal return and all supporting documentation.

[Statutory Authority: RCW 82.32.300 and 82.01.060(2). 09-04-008, § 458-57-115, filed 1/22/09, effective 2/22/09. Statutory Authority: RCW 83.100.047 and 83.100.200. 06-07-051, § 458-57-115, filed 3/9/06, effective 4/9/06.]

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