If left unchanged, the revised estate tax signed into law by Governor Gregoire, could surprise many middle class Washingtonians.

The new law should significantly increase revenues from this source above previous levels. Before the court decision that threw out the old tax, Washington estate tax collections swelled from 0.4 percent of all state taxes collected in 1995 to 1.1 percent in 2004.

Complete with an emergency clause circumventing the people’s the right of referendum, SB 6096 wasn’t titled as an estate tax, but “AN ACT Relating to generating new tax revenues to provide education funding...” It was not a new tax because it restored a tax whose origins extend all the way back to 1901.

The law places the filing threshold at $1,500,000 for those filing their returns between May 17, 2005 and December 31, 2005. For those filing after the beginning of 2006, the threshold will be $2,000,000.

The Democrat majority, not content with just replacing the tax, chose to significantly increase the rates. A quick comparison of the state death tax credit table established in 1981 when Initiative 402 was passed, reveals that when entering the tax table at $1,500,000, the rate has gone from 7.2 percent to 14 percent. The rate stays above that of the people approved 1981 Initiative so that for estates over $10 million, the new rate begins at $1,440,000 plus 19 percent versus $1,082,800 plus 16 percent.

The law contains exemptions for family farms and “the value of any tangible personal property used primarily for farming purposes.” According to the May 17, 2005 Special Notice, this definition is broad enough to include timberlands that are passed to “qualified heirs.” There is no exemption for family run businesses.

There are no provisions to adjust the filing thresholds for inflation as the legislature mandates for employers paying for costs of alcohol and substance abuse treatment. This pre-meditated oversight coupled with higher rates is perniciously designed to erode middle class estates. Cumulative effects of inflation in the 1970s destroyed enough small businesses and forced sale of farms at death to the extent that there was a public backlash that culminated in the 1981 initiative.

On Monday May 23, Governor Gregoire appointee Judi Wilkerson announced that with regard to the recently adjourned legislature, “The real winners are our children.” Correction, the real winners are estate planning teams of life insurance agents, attorneys, accountants, and trust officers, who will collect fees and commissions guiding prudent people of ordinary means to rearrange their affairs in such a manner that their heirs won’t have to sell their houses.

They will have to balance post death liquidity needs to pay increased taxes due after death with maintaining enough liquidity to meet the risks of diminished health and inflated living costs beforehand. Currently numerous waterfront houses on Bainbridge Island (year to date increase:19 percent) already qualify the owners for this tax.

Anyone with a rudimentary understanding of Economics 101 knows that when you constrict supply, the resulting demand is reflected in significantly higher prices. It is only a matter of time until the predicted effects of the artificial constriction of allowable building lots will spiral many modest homes upward to levels that trigger this tax.

If you are trying to estimate how long it would be before your estate gets hit by this tax, decide what you believe the average growth rate will be between now and life expectancy.

Consider that a 50 year old has a life expectancy of 30 years. Divide that growth rate into 72. That’s how long it would take for your estate to double. Using the current 10 percent growth rate of real estate in Seattle, that would be 7.2 years. Then divide that number into the years to life expectancy, which in this instance is over 4. This becomes the number by which you multiply your current net worth. Yes, it is true that significant intangible assets, such as savings and securities, could be consumed in retirement. However, real estate will continue to appreciate.

Given the uncertainty of the federal estate tax, most people today don’t plan their estates to pay estate taxes by setting up trusts to keep their life insurance out beyond the tax or to shift assets to reduce estate value at the death of the second spouse. Since the inflationary period that started in the 1970s, many have chosen term insurance over whole life. Increased life expectancies combined with high term rates and/or unavailability at the ages when most people die means many baby-boomers whose estates will come under this tax will be forced to use whatever liquid assets are left then liquidate assets.

This increased state estate tax will be paid in addition to any federal estate tax due. It is scheduled to expire in 2010 only to be reincarnated in full in 2011 dropping the federal threshold to $1,000,000.