Estate Planning

Most CPAs and many attorneys use websites with preformatted content that tell you that they do “estate planning”.  However, we have found two basic issues in the community.

First, most CPAs do very little estate planning, and it doesn’t turn out to be a significant part of their practice.  In fact a few CPA’s/tax preparers are consulting clients with us.  We do a lot of it and I have maintained an active membership in the “Estate Planning Council of Southwest Washington” for 30 years.  We are focused pretty much on estate tax issues, and not the other parts of the process.

Second, there are some well qualified attorneys that we know that forget that estate planning should be a team.  Some of these attorneys prepare tax returns, and the quality varies widely (some do a very good job, some not, not naming names).  My comment is that I would not pretend to sell investments or insurance, nor would I draft a will or trust.

The team should include the financial advisor, an attorney, and a CPA, and of course you.

Anyway, estate tax planning breaks down into two areas, what you can do before and after a death.  There are more opportunities to do things after death in this area (sometimes termed post mortem estate planning, I call it late estate planning) than many know.  Much of this surrounds the preparation of the relevant tax returns.

Two Main Taxes

The first is a tax on the value of the net assets.  Both the IRS (Form 706) and some states, including Washington and Oregon have a dog in this fight.  However, they are in a minority, and roughly only one third of states have an estate tax, including believe it or not California.  In fact, Washington arguably has the highest tax and tax rates in the US, especially for large estates.  The IRS limit is about $11,200,000, which is adjusted for inflation, Washington around $2,200,000, also adjusted for inflation, and Oregon starts at $1,000,000.  Regarding states, you are affected by both your state of residence, and other states where you have property located.  Interestingly, most states look at property within an LLC is not being “real estate”, but more of a security for this purpose.  Once you have hit the federal level, a Washington resident can expect to pay close to 50% or more of the excess as taxes.

The gift tax (Form 709) is a sidebar to the estate tax, and is meant to capture items that reduce your estate.  Interestingly, Washington has no gift tax.  There is currently a $15,000/year per person exemption for each donee as noted below.

The second is a tax on the income retained by the probate estate or living trust (Form 1041) during the period of administration.  The income can either be taxed to the estate/trust, or distributed.  The details are beyond the scope of the website, but in general retained income is taxed at very high rates. 

We get a lot of questions, and know there are many misunderstandings out there about estate tax.  We will cover a few of them here.  For the following, I mean the estate tax as the tax on the value of the assets unless otherwise noted.

  • A living trust does not magically avoid or even reduce estate taxes all by itself.  All assets of the deceased, regardless if probated or not are potentially subject to the tax on value.  Avoiding probate, privacy, and having an immediate person in charge (i.e. the trustee) are all pluses of creating a living trust.  We review trusts and wills, but leave the drafting to the legal profession.
  • There are some items such as IRAs, annuities, installment sales, and most US Savings Bonds that carry income that was not taxed to the deceased.  They do not get a “stepped up basis”.  The beneficiary who receives the money will pay income tax on those amounts.  Annuities tend to be the big surprise for most.
  • You can pay estate tax to your state of residence even if you do not owe the IRS, or in some cases the other way around.  Many states have no estate tax as mentioned earlier.
  • Charitable strategies can be used to reduce both estate tax and income tax.  Many charities have “planned giving departments” to encourage contributions, and we like to have them involved when they are available.  For the average person with a large asset and not much fallback income, my favorite is usually the charitable remainder unitrust.
  • Making gifts to people, such as children, does not reduce your income tax, but will usually reduce the size of your taxable estate as long as it is a completed gift with no retained interest.  Transfers up to $15,000 (adjusted upwards from time to time) do not usually require any reporting.
  • A family partnership is good estate tax planning tool, but must be based on sound business reasons such as keeping property as a family legacy.


There are more advanced strategies such as QTIP’s (often used in second marriages with different heirs) and defective grantor trusts that have special uses.  Sales to defective grantor trusts are a hot issue.   Also with the 2018 limitation on itemized deductions, some long term land investments are best held in an irrevocable trust.    

Like in other areas, we can’t solve all problems alone.  There are strategies that certainly are beyond our knowledge.  Fortunately there is a lot of good estate planning talent in the Vancouver/Portland area that we can team up with and we ljke being part of a good winning team.

HB Morris Financial Services, LLC

12009 NE 99th Street, Suite 1420
Vancouver, WA 98682

Phone: (360) 687-3154
Fax: (360) 687-6967

Mailing Address:
P.O. Box 2557
Battle Ground, WA 98604

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