Washington Estate Tax 2026: $3M Exemption, 20% vs 35% Rate

Meet the Larsons. Erik and Karin are married, both Washington residents, both 71. Their combined net worth is $7,000,000: a 40-acre berry farm in Skagit County operated as an S-corp worth $2,500,000, a $3,200,000 home and investment portfolio, and $1,300,000 in retirement accounts. Erik runs the farm; their daughter has worked it alongside him for the last decade. If Erik dies in August 2026 with no planning, his $7,000,000 estate owes Washington roughly $550,000 in estate tax. If the family qualifies the farm for Washington’s qualified family-owned business deduction, that bill drops to about $170,000 — a $380,000 swing on a single election. This article shows you the math behind that decision and the alternative when the business does not qualify.

The 2026 Washington estate tax is a moving target — date of death changes everything

Washington overhauled its estate tax twice in twelve months, and the result is a split-year 2026 that almost no other state has. You cannot reason about a Washington estate without first asking when the death occurs.

• Deaths January 1 – June 30, 2026: governed by SB 5813 (enacted 2025). Exemption $3,076,000 (CPI-indexed). Top rate 35% on the Washington taxable estate above $9,000,000.
• Deaths on or after July 1, 2026: governed by SB 6347 (enacted 2026), which rolls the rate schedule back to its pre-2025 form. Exemption $3,000,000. Top rate 20% above $9,000,000.

That is not a typo: a death on June 30, 2026 and a death on July 1, 2026 are taxed under different rate schedules. SB 6347 reverted the brutal 35% top rate that had been in place since July 1, 2025 back to the long-standing 10%–20% graduated schedule, and it effectively froze the $3,000,000 exemption going forward by pointing the inflation index at a series that no longer exists. For nearly every Washington estate the post-July-2026 numbers are the relevant ones, so this article uses them — but if a death occurred in the first half of 2026, the 35% schedule and the $3,076,000 exemption apply, and the tax is materially higher.

How Washington actually computes the tax: only the excess, on a graduated schedule

A common and expensive misconception is that crossing the exemption taxes the entire estate. It does not. Washington taxes only the Washington taxable estate — the value above the $3,000,000 exemption — and it does so on a graduated schedule, not a flat 20%. The 20% rate is the top marginal rate; it does not apply until the taxable estate exceeds $9,000,000.

Here is the post-July-2026 rate schedule (RCW 83.100.040, pre-2025 form restored by SB 6347). The brackets apply to the Washington taxable estate — the amount remaining after the $3,000,000 exemption and any deductions:

Apply this to the Larsons. Erik dies in August 2026 with a $7,000,000 estate. Subtract the $3,000,000 exemption and the Washington taxable estate is $4,000,000. Walk the brackets: $100,000 on the first $1,000,000, plus $140,000 on the next $1,000,000, plus $150,000 on the next, plus $160,000 on the last $1,000,000 — $550,000 total. Note this is far below the “20% of $4,000,000 = $800,000” figure you would get by misapplying the top rate to the whole taxable estate.

The decision: qualify the business for the deduction, or gift it down

Washington’s single most valuable estate planning provision for operating families is the qualified family-owned business interest (QFOBI) deduction under RCW 83.100.048. It removes up to $3,000,000 from the estate before the rate schedule runs. SB 5813 (2025) raised this cap from the prior $2,500,000 effective July 1, 2025, and SB 6347 left the $3,000,000 figure in place going forward. The deduction is not automatic — you elect it on the estate tax return, and the estate must clear a strict qualification test.

The QFOBI qualification gates (all must be met)

1. The 50% test. The qualified family-owned business interest must exceed 50% of the Washington taxable estate, computed without regard to the deduction (the statute’s exact phrasing). A $2,500,000 farm inside a $4,000,000 pre-deduction taxable estate clears this (62.5%); the same farm inside a $9,000,000 taxable estate does not (28%).
2. The activity test. The decedent or a family member must have materially participated in the business for at least 5 of the 8 years before death.
3. The successor test. A qualified heir must continue to materially participate after death.
4. The size cap. The aggregate net value of the qualified interest cannot exceed $6,000,000.
5. The 3-year recapture rule. If the heir sells the business or stops qualifying within 3 years of death, the deduction is recaptured — an additional estate tax becomes due. This is the trap that turns a tax win into a clawback.

The math, side by side

The deduction-claimed column: $1,500,000 taxable estate is $100,000 on the first $1,000,000 (10%) plus $70,000 on the next $500,000 (14%) = $170,000. The election is worth $380,000 to the Larsons — provided their daughter keeps operating the farm for at least 3 years after Erik’s death. If she sells in year two, the $380,000 comes back as recapture tax. That recapture risk is the real decision, not the deduction itself.

When the business will not qualify: gift it down instead

The QFOBI deduction fails the moment the business is less than 50% of the taxable estate. A family with a $1,500,000 business inside a $9,000,000 estate gets nothing from it. For those families — and for families whose heirs will not stay in the business — the alternative lever is lifetime gifting, and Washington hands you an enormous structural advantage here.

Washington has no gift tax. Unlike the federal system, where lifetime gifts consume your $13,990,000 federal exemption (2026), Washington does not add lifetime gifts back into the taxable estate. A dollar moved out of your name while you are alive is permanently outside the Washington estate tax base. This makes annual and lump-sum gifting far more powerful in Washington than the federal mechanics alone would suggest.

• Annual exclusion gifts. The federal annual gift exclusion is $19,000 per donee in 2026 (IRC §2503(b)). A married couple can move $38,000 per child per year with zero federal gift-tax filing — and zero Washington consequence.
• Larger lifetime gifts. A gift that uses federal exemption (above the annual exclusion) still leaves the Washington estate immediately. Moving $2,000,000 of appreciated stock to an irrevocable trust removes $2,000,000 plus all future growth from the Washington base — potentially $360,000–$400,000 of Washington tax at the 18%–20% top tiers.
• SLATs and credit shelter trusts. Because Washington offers no portability, the spousal lifetime access trust (SLAT) and the bypass/credit-shelter trust are the core tools to capture both spouses’ $3,000,000 exemptions.

What most people miss: no portability means the first $3M is use-it-or-lose-it

On the federal return, a surviving spouse can elect portability and inherit the deceased spouse’s unused $13,990,000 exemption. Washington has no portability. If Erik dies and leaves everything to Karin under the unlimited marital deduction, his $3,000,000 Washington exemption vanishes. When Karin later dies with the full $7,000,000, her estate gets only one $3,000,000 exemption — a $4,000,000 taxable estate and $550,000 of Washington tax that proper planning would have avoided.

The fix is a credit shelter (bypass) trust. At the first death, $3,000,000 funds an irrevocable trust that uses the first spouse’s exemption; the surviving spouse can receive income and limited principal, but the trust assets — and their growth — stay out of the survivor’s taxable estate. This converts the family’s combined exemption from $3,000,000 to $6,000,000. For the Larsons, sheltering the first $3,000,000 at Erik’s death would eliminate the entire $550,000 second-death tax on that slice. Couples relying on a simple “all to my spouse” will are throwing away $3,000,000 of exemption.

One more interaction: the 7% capital gains tax

Washington also imposes a 7% tax on long-term capital gains above $250,000 per year (RCW 82.87, in force since 2022). This matters for the gifting decision: gifted assets carry over your basis, so an heir who later sells inherits your low basis and may owe both the 7% Washington capital gains tax and federal capital gains. Assets held until death instead receive a step-up in basis to date-of-death fair market value under IRC §1014, wiping out the embedded gain. The planning tension is real: gifting wins the estate-tax fight but can lose the capital-gains fight on highly appreciated property. Gift low-basis growth assets you expect heirs to hold; keep highly appreciated assets you expect them to sell in the estate for the step-up.

The decision lever

The Washington estate tax decision comes down to one question about your operating business: will a qualified heir keep running it for at least 3 years after your death? If yes, and the business clears the 50% test, elect the QFOBI deduction — on a $7,000,000 farm estate that is $380,000 kept in the family, and it requires no asset transfers during your life. If the answer is no, or the business is too small a share of the estate to qualify, your lever is lifetime gifting into trust, made unusually powerful by Washington’s missing gift tax, paired with a credit shelter trust to capture both spouses’ $3,000,000 exemptions. Run the 50% test against your current balance sheet today: that single ratio tells you which of the two paths is yours.