Christopher S. Mulvaney,

Attorney and Counselor-at-Law

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THIS WEBSITE INCLUDES GENERAL INFORMATION & THE OPINIONS OF CHRISTOPHER S. MULVANEY. IT IS INTENDED TO STIMULATE A BASIS FOR QUESTIONS RELATED TO YOUR PARTICULAR FACTUAL CIRCUMSTANCES — BEFORE YOU ACT.  THIS WEBSITE DOES NOT CONSTITUTE LEGAL ADVICE. IF YOU WANT LEGAL ADVICE, PLEASE MAKE A ZOOM APPOINTMENT TO SPEAK WITH ME.

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Gonzaga University School of Law – Spokane, Washington – Class of 2002 – Cum Laude The Latin phrase “Deo patriae, scientiis, artibus” translates to “For God and country through sciences and arts”.  The initials A.M.D.G. on the seal of Gonzaga Law School stand for Ad Majorem Dei Gloriam, which is Latin for “For the Greater Glory of God” the Motto of the Society of Jesus (Jesuits): a Catholic religious order founded by St. Ignatius of Loyola.

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“Simple is good.”
– Jim Henson

Before considering Estate Tax avoidance techniques it is worth considering moving to a State that doesn’t have Estate Tax.

Twelve States and the District of Columbia Levy State Estate Tax (Top Marginal Rates in 2025-Exemption): Washington (35%-$3M);, Hawaii (20%-$5.49M); Illinois (16%-$4M); Massachusetts (16%-$2M); Minnesota (16%-$3M); New York (16%-$7.16M); Oregon (16%-$1M); Rhode Island (16%-$1.8M); Vermont (16%-$5M); D.C. (16%$4.87M; Maine (12%-$6.8M); Connecticut (12%-$13.99M).

The only State with a State Level Gift Tax is Connecticut with a Top Marginal Tax Rate of Twelve Percent (12%).

Nine states do not have a State Income Tax: 

Alaska; Florida; Nevada; New Hampshire; South Dakota; Tennessee; Texas; Washington; Wyoming. 

Eight states have no state income tax and no state estate tax:

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming.

If you are married, transfers between Spouses are unlimited during life and after Death, so Estate Tax only applies to the Surviving Spouse (unless the Surviving Spouse is not a U.S. Citizen in which case the transfer limit in 2025 is $190,000.

There are five things you need to do first, in order to determine in an Irrevocable Asset Protection Trust is necessary or not. Irrevocable Trusts accomplish the goals of avoiding Estate Tax and protecting assets that are not available with a Revocable Living Trust. Irrevocable Trusts cost about $15,000. You can’t get the money back once transferred to the Irrevocable Trust. Irrevocable Trusts are primarily for people with adult children who tend to be middle age. Irrevocable Trusts are the deep end of the pool.  I recommend starting in the shallow end where the costs and risk are much lower, and working your way into the deep end.

(1) SPLITTING A MARRIED ESTATE INTO TWO SEPARATE PROPERTY TRUSTS

If you are married, you can create two Married Separate Property Trusts and, for example, put half of your assets in each Trust. That way, when one spouse passes the Estate is split in half making it less likely to be above the $3 million WA Estate Tax Filing Threshold. You also give a distribution to adult children when the first parent passes, which can be an advantage for spoiling your grandchildren. This only works for $3 million being given to a non-spouse. Transfers above that amount after death would trigger WA Estate Tax, so gifts larger than that amount can be given through the Family LLC described below.

(2) USING AN AB TRUST IS NOT NEEDED IF YOU USE MARRIED SEPARATE TRUSTS WITH UP TO $3 MILLION IN EACH.

The purpose of an AB Trust is to delay taxation on up to $3 million, the Washington Estate Tax Exemption. This has disadvantages. There are better options.

While AB trusts were once a primary tool for minimizing federal estate taxes, their relevance has decreased due to changes in tax laws, particularly the introduction of portability (the Federal exemption is per person, not per couple) and higher federal estate tax exemptions ($15 million per person: $30 million per couple). 

The only reason to do an AB Trust is to delay Washington Estate Tax up to 35% above $3 million in the event of the simultaneous death of both spouses because if one spouse survives, that spouse can do any necessary planning. Transfers between spouses are unlimited and free of tax both during life and after one spouse passes away.

It is much better to avoid Estate Tax altogether on up to $3 million and give beneficiaries a step-up in cost basis by giving up to $3 million in married separate property trusts which become irrevocable after either spouse passes. There is no need for expensive tax advice to decrease risk or complex time consuming and stressful management with married separate property trusts.

If you don’t want to give $3 million to your adult children, then don’t. There are other options for a married separate property trust. It can give to charity to reduce income tax for the surviving spouse; it could be used to create an irrevocable charitable remainder trust to provide lifetime income and asset protection for the surviving spouse.

Here are the key disadvantages of AB trusts in Washington state in 2025:

1. Complexity and cost

• Setting up an AB trust is more complex than other options and typically requires professional legal and financial advice (both a financial planner and a CPA), leading to much higher initial costs.
• After the first spouse dies, the surviving spouse needs to divide assets between two trusts (Trust A and Trust B), which can be complex and requires legal and accounting assistance, incurring high additional expenses.
• The irrevocable nature of Trust B (Bypass Trust) adds to the complexity and necessitates meticulous management and record-keeping (there are tax penalties for not following the rules and keeping complete accurate records increasing costs even more) by the surviving spouse as trustee. 

2. Irrevocability of trust B

• Trust B, containing the deceased spouse’s exemption amount of $3 million, becomes irrevocable upon the first spouse’s death.
• This means the surviving spouse cannot change its terms, including beneficiaries, making it less flexible in case of changing family needs or circumstances.  If the terms of the Trust are not followed precisely, there can be penalties and potentially litigation further increasing costs.

3. Limited access to assets

• The surviving spouse’s access to the assets in Trust B is limited, usually to income generated by the trust or to meet ascertainable standards like health, education, maintenance, and support needs. The tax rate on the income is high.

Income taxation on the earnings of a B Trust (Bypass Trust) after the death of the first spouse involves a nuanced approach:

1. Taxation to the Trust or Beneficiary: Generally, income generated by a B Trust can be taxed to either the trust entity itself or to the beneficiaries who receive distributions from the trust.
2. Distributable Net Income (DNI): The concept of DNI is crucial here.
   • Income Retained by the Trust: If the trust retains and accumulates income, this income is typically taxed at the trust’s income tax rates, which are generally more compressed than individual income tax rates.
   • Income Distributed to the Surviving Spouse (Beneficiary): If the B Trust distributes income to the surviving spouse (who is a beneficiary), the trust can often claim an income distribution deduction for the amount distributed. The surviving spouse, in turn, includes this distributed income in their own taxable income and pays taxes at their individual income tax rates, which are typically lower than trust tax rates.
3. Capital Gains: The taxation of capital gains in a B Trust also depends on whether they are retained or distributed.
   • Capital Gains Retained by the Trust: If capital gains are allocated to the trust’s principal (which is common in B trusts designed to preserve assets), the trust pays the capital gains tax.
   • Capital Gains Distributed to the Surviving Spouse: If the B Trust is structured to distribute capital gains, the surviving spouse as the beneficiary would pay the capital gains tax. The applicable rates depend on whether they are short-term or long-term capital gains, and can be lower than the trust’s capital gains rates.
4. No Step-Up in Basis for B Trust Assets: A significant point to remember is that assets held within a B Trust do not receive a “step-up in basis” upon the death of the surviving spouse. This means that when those assets are eventually sold by the final beneficiaries (e.g., the children), they might face higher capital gains taxes compared to assets that did receive a step-up in basis.
5. Purpose of B Trust: It’s crucial to remember that B Trusts are primarily used to maximize estate tax exemptions for married couples and ensure assets are distributed according to the deceased spouse’s wishes, particularly in situations like blended families or protecting assets from the surviving spouse’s creditors. 

Important Note: The specifics of B Trust taxation can be complex and depend heavily on the terms of the trust agreement and applicable state and federal laws. You should consult with both a tax advisor and an investment advisor for personalized advice regarding your specific situation to avoid expensive mistakes.  This increases the administration costs, but it is worth it.

• This restriction might hinder the surviving spouse’s financial security and ability to adapt to changing needs or circumstances.

4. Potential overfunding

• With the current higher federal estate tax exemptions, there’s a risk of overfunding Trust B, which could unintentionally limit the surviving spouse’s access to sufficient assets.

5. Potential capital gains tax burden

• Assets in Trust B do not receive a second step-up in basis at the death of the surviving spouse.
• This can lead to higher capital gains taxes for heirs upon selling those assets, compared to assets held in Trust A or transferred directly to the surviving spouse.

Better options

Here are some potential alternatives to an AB trust, especially in Washington state:

1. Married Separate Property Revocable Living Trust

• a revocable trust is a more straightforward and less expensive alternative.
• It avoids probate and allows for quick distribution of assets to beneficiaries.
• The trust doesn’t remain in existence for years, eliminating the need for ongoing trust tax returns and complex administration.
• This type of trust provides more flexibility for the surviving spouse. 

2. Strategy of Giving While Living Rather Than Waiting to Die Before Giving

• Lifetime gifting: Washington State doesn’t impose a gift tax, so gifting assets during your lifetime can reduce the size of your estate and potentially avoid or minimize Washington estate tax. Federal gift tax rules allow couples to give up to $30 million before triggering tax, so unless you are in the top tenth of the top 1% of U.S. households in wealth, this will not be an issue.

There are a couple of more expensive and more technical options than the first two which are sufficient for the vast majority of people.

• Irrevocable life insurance trusts (ILITs): These trusts can hold life insurance policies and potentially keep the death benefit out of the deceased spouse’s estate, avoiding estate tax.
• Family limited partnerships (FLPs) or LLCs: These structures can be used to transfer assets to family members while potentially reducing the taxable value of the estate for Washington estate tax purposes. 

(3) PAYING OFF THE DEBTS OF ADULT CHILDREN; FUNDING GRANDCHILDREN’S EDUCATION

It is important to understand that: gifts made during life have your cost basis for the Beneficiary; gifts made after Death have a Step Up In Cost Basis to the fair market value of the property at the date of the decedent’s death. 26 U.S. Code § 1014

You can pay off student loans, mortgages or other debts, buy cars, fund retirement, invest in stocks, or many other creative ways of giving to multiple generations of your family which reduces the need for an Irrevocable Trust. Your generosity can encourage good character rather than creating a Trust Fund Baby situation like The Talented Mr. Ripley in which Dickie Greenleaf lives like Peter Pan sailing in Italy instead of working or growing up because he has an Irrevocable Trust Fund that his parents can’t change.

(4) CREATE A FAMILY LLC WHICH IS A COMPLETED GIFT TO ADULT CHILDREN

You can create a Family LLC, which is a completed gift to your children so that they pay taxes on the earnings of the assets. You report transfers to the LLC on IRS Form 709 just like money you give that exceeds the annual gift reporting exclusion ($19,000 in 2025). Doing so removes the assets from your Estate for Estate Tax Purposes. However, you retain management rights in the LLC pursuant to the Operating Agreement of the LLC. You write the checks to pay for you young adult child’s education, car, clothing, apartment, medical care, house, wedding, or whatever you think is a benefit to them and not a waste of the money. The Federal Unified Gift and Estate Tax Exclusion for 2025 is $13.99 million per person ($27.98 million per couple). Whatever is transferred into a family LLC reduces the amount that can be transferred into an Irrevocable Asset Protection Trust and which reduces the need for an Irrevocable Trust.

(5) ADULT CHILDREN SHOULD CREATE SEPARATE PROPERTY TRUSTS TO PROTECT GIFTS AND INHERITANCE DURING MARRIAGE.

Adult children should create their own Estate Plans including Separate Property Trusts and their gifts should be given to them as Trustees of their Separate Property Trusts. This protects your adult child’s property in the even of divorce. It also protects your grandchildren because the beneficiary of Married Separate Property Trust children rather than the surviving spouse which reduces the need for an Irrevocable Trust.

(6) CREATE AN IRREVOCABLE ASSET PROTECTION TRUST, PARTICULARLY OF THE CHARITABLE REMAINDER VARIETY

All Revocable Living Trust (RLT) become Irrevocable Trusts (IT) at the death of the Trustor who created the Trust. Irrevocable Trusts can be created during life, but you can’t get the assets back once you put them in, so they are expensive. Filing IRS Form 709 is required for all assets transferred to the IT and the IT must have its own EIN and file its own tax return.

Irrevocable Trusts & Family LLC’s are for people with a Net Worth in excess of $5 million and no debt. Net Worth specifically excludes your paid off primary residence, your fully funded not borrowed against retirement accounts, your paid off primary vehicle, and 6 months of personal emergency cash savings because all of those are needed for you to live now, and in the future.  Net Worth is what you can lose and still live at the same level you are living now. If you haven’t paid off your student loans, house, car, credit cards, and medical bills, do that first. Then get cash savings. Then consider investment products to avoid Washington Estate Tax and Protect Assets for yourself and multiple generations of your family.

Irrevocable Trusts are for people who have given $4.386 million to their children when one parent dies using an AB Trust, paid for their children’s college education and bought them a house and car, funded their retirement, investment accounts, and spending accounts, and put $2 million or more into a Family LLC for the benefit of their children and still have a Taxable Estate over $4.386 million.

Irrevocable Trusts last for 150 years before they are dissolved by Statute. This is about 7 generations if each generation is about 21 and a half years. Coincidentally, Native American Tribes for thousands of years had a concept of 7 Generation Planning that was commonly practiced throughout their whole culture. Descendants of early European Immigrants such as myself typically reserve this type of planning for the uber affluent, which is a shame. Thinking about our children, grandchildren, great grandchildren, great great grandchildren, great great great grandchildren, great great great great grandchildren, great great great great great grandchildren would do us a lot of good, especially when thinking about issues like climate change and national debt. Trying to figure out how many generations it would take to pay off the National Debt is so difficult that we don’t even try. It will take forever if we never start.

Here is an Investopedia link to more information.

Below is information from Fidelity about a particular kind of Irrevocable Trust called a Charitable Remainder Trust which combines the benefits of charitable giving including income tax reduction benefits with an Irrevocable Asset Protection Trust.

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WASHINGTON STATE HAS NO GIFT TAX;

ONLY AN ESTATE TAX

The WASHINGTON ESTATE TAX TABLES show a filing threshold and exclusion amount in 2025 is $3.00 Million U.S. Dollars, with a marginal tax rate starting at 10% and a top rate of 35% (starting July 01, 2025 – indexed for inflation starting in 2026) (the highest in the Nation by far). An Estate Tax Return must be filed by the Successor Trustee if the total Estate value is above that amount.

Transfers between Spouses are unlimited during life and after death, so Estate Tax only applies to the surviving Spouse (unless the surviving Spouse is not a U.S. Citizen in which case the transfer limit in 2025 is $190,000.

Calculating the tax on highly appreciated assets and comparing that to the WA Estate Tax is important to make the best decisions. For example, the WA Supreme Court ruled that the 7% WA Excise Tax on proceeds of real estate sales above $250,000 that went into effect on 01 January 2022 was constitutional. There is Federal Tax in addition to State Tax.

• If you sell real estate in under one year, short-term capital gains are taxed as ordinary income (up to 37%).
• Sales after owning for one year are taxed at long-term capital gains rates: 0%, 15% or 20% depending on your income tax bracket.

So, if you are married earning over $100,00 per year, 15% is added to 7% for a total of 22%. That is higher than the top marginal tax rate, so you may be better off paying the Estate Tax. This is offset because the Estate Tax is on total value including principle, and the other taxes are only based on the gain not the principle, so both the rate and the amount being taxed are different. The more highly appreciated the asset is (for example, an asset owned for 50 years or more) the more benefit to paying the estate tax.

IRS Lifetime Unified Exclusion Amount For Estate And Gift Tax in 2025 is $13,990,000 U.S. Dollars per person; $27,980,000 U.S. Dollars per couple (only the top quarter of the top 1% of Taxpayers file a Federal Estate Tax Return (IRS Form 706), and only the top tenth of the top 1% pay Federal Estate Tax). Federal Marginal Rates of Estate tax range between Eighteen Percent (18%) and Forty Percent (40%).

Federal Annual Gift Tax Exclusion From Reporting in 2025 is $19,000 U.S. Dollars. File IRS Form 709 if you give more than that amount to anyone other than your Spouse in a year to report the Gift. Tax is owed only above the Exclusion Amount by the Giver of the Gift, not the Recipient, so many Givers have a Reporting Requirement, but pay no Tax. The Gift is deducted from the Exclusion Amount.

Fiduciary Tax Returns (IRS Form 1041) ◄

If the Trust will have earnings for a period of years after the Grantor dies, but before the Trust is fully Distributed, then the Successor Trustee is strongly advised to hire a CPA to prepare the required Fiduciary Tax Returns and get advice on Tax issues. IRS Form 1041 gives a basis for questions of the CPA for the Estate.

CHARITABLE REMAINDER TRUST –

REAL LIFE EXAMPLE

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I had a client with $4 million, who created two Charitable Remainder Trusts, one for each of his daughters with $1 million each. This avoided WA Estate Tax, generated 5% income for life for his daughters, and provided asset protection for him and his daughters. 5% of $1 million is $50,000. His daughters received that amount paid out weekly. When each daughter passes away decades in the future, the charity gets all of the principal in the account. The amount will be much higher than $1 million because the average stock market return is about 10%. So, about $100,000 per year will be added to the account, and $50,000 removed, meaning that the next year each daughter will receive about $52,500, and so on throughout their lives.

The father cannot lose the $2 million in principal and neither can the daughters because neither owns it. So, devastating medical expenses, bankruptcy, divorce, alcohol, drug or gambling addiction cannot reduce the principal. This provided a $2 million charitable gift tax deduction, estate tax reduction, annually increasing lifetime income, and asset protection. This strategy checked all of the boxes for this client’s goals.

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Washington State residents can meet with me in Zoom/DocuSign from anywhere in the world, and I can notarize their electronic signatures because I am a remote online notary.  Just email me an image of your photo ID.