REPEAL OF THE STATE DEATH TAX CREDIT BY P.L. 107-16
AND THE EFFECT ON THE WASHINGTON STATE ESTATE TAX
AND GENERATION-SKIPPING TRANSFER TAX
Dean V. Butler
Stokes Lawrence, P.S.
800 Fifth Avenue, Suite 4000
Seattle, Washington 98104-3179
Telephone: (206)626-6000
Facsimile: (206)464-1496
E-mail:
January 29, 2002
A.Summary
The Washington State estate tax and generation-skipping transfer tax (“GST tax”) is based on the credits allowed against federal estate taxes for state “death taxes” and state GST taxes. Washington State bases its estate and GST tax on the Internal Revenue Code of 1986, as amended as of January1, 2001 (the “IRC”) without regard to further Congressional amendments. In order to incorporate into Washington law federal amendments made after January1, 2001, the Washington State Legislature must either update the date of the IRC referenced in the Washington estate tax and GST tax statutes, or incorporate the federal amendments by specific adoption of those amendments.
Since the Washington estate and GST taxes are currently calculated based on the IRC as in effect January1, 2001, they do not reflect the amendments made to the IRC by the 2001 Tax Act. Accordingly, as the federal exemptions increase, rates decrease, the credit for state death taxes is phased out, and the federal estate tax and GST tax are finally (if ever) repealed in 2010, Washington’s estate and GST taxes will continue to be determined under the IRC as in effect on January1, 2001. Only the Legislature (or an initiative of the people) can remedy this situation.
B.NEW FEDERAL LAW
On June7, 2001, President Bush signed into law the “Economic Growth and Tax Relief Reconciliation Act of 2001,” H.R.1836, P.L.10716 (the “Act”), thereby amending the Internal Revenue Code of 1986 (the “IRC”).
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C.DATE OF INTERNAL REVENUE CODE FOR PURPOSES OF TITLE11 RCW, RCW83.100 AND RCW83.110
1.RCW References
Washington State imposes an estate tax equal to the credit allowed against the federal estate tax for state death taxes. Washington also imposes a generation-skipping transfer tax (“GST tax”) equal to the federal credit allowed against the federal GST tax for state GST tax. These types of taxes are generally known as “pick-up” taxes because they “pick up” the federal credits. In effect, the federal and state estate taxes and GST taxes equal what the federal taxes would have been were there no state transfer tax. Accordingly, if the state tax statutes conform to the federal law, the taxpayer pays no additional tax by reason of the state estate and GST “pick-up” taxes.
Pursuant to Washington H.B.1361, Chapter 320 of the 2001 Session Laws (Regular Session), effective July1, 2001, references to the “Internal Revenue Code” in Title11 (Probate, Estates and Trusts) of the Revised Code of Washington (“RCW”), in RCW83.100 (the Washington Estate Tax and GenerationSkipping Transfer Tax) and in RCW83.110 (the Washington Uniform Estate Tax Appointment Act) have the following meanings:
(a)RCW11.02.005(16)
For purposes of Title11 of the RCW, RCW11.02.005 (16) defines “Internal Revenue Code” to mean the “United States Internal Revenue Code of 1986, as amended or renumbered on January1, 2001.”
(b)RCW83.100.020(15)
RCW83.100.020(15) [the Washington State Estate and GST Taxes] states that for purposes of RCW83.100 and RCW83.110.010, the term “Internal Revenue Code” means the “United States Internal Revenue Code of 1986, as amended or renumbered as of January1, 2001.”
(c)RCW83.110.010(3)
RCW83.110.010(3) [the Washington State Uniform Estate Tax Apportionment Act] provides that for purposes of RCW83.110, the term “Internal Revenue Code” means the “United States Internal Revenue Code of 1986, as defined in and as renumbered as of the date specified in RCW83.100.020.”
2.Reason Why IRC References Must be Updated Periodically and Why Future Acts of Congress Cannot be Incorporated Prospectively
The Washington State Supreme Court historically has held that it is unconstitutional for the Washington State Legislature (the “Legislature”) to delegate its legislative functions to others; however, it is not unconstitutional for the Legislature to delegate administrative powers. Keatingv. Public Utility Dist. No.1 of Clallam County, 49Wn.2d 761, 767 (1957).
In State ex rel. Kirschnerv. Urquhart, 50Wn.2d 131 (1957), the court stated, “Statutes adopting Federal rules, regulations or statutes, are valid but attempts to adopt future Federal rules, regulations or statutes are unconstitutional and void.” 50Wn.2d at 136. The court went on to say, “Subsequent changes [to federal statutes, regulations or rules] do not invalidate past adopted federal statutes, regulations or rules.” 50Wn.2d at 136. In Statev. Reader’s Digest Ass’n, Inc., 81Wn.2d 259 (1972), the court wrote, “The adoption of future federal rules, regulations or statutes would be an unconstitutional delegation of legislative power.” 81Wn.2d at 275.
Statev. Dougall, 89Wn.2d 118 (1977), was a criminal case wherein the defendant was charged with illegal possession of a “controlled substance” in violation of Washington Uniform Controlled Substances Act. At that time, the Washington State Board of Pharmacy could cause a substance to be added to Washington’s list of controlled substances by taking no action within 30days of the United States Department of Justice adding the substance to the federal list of controlled substances. The U.S. Department of Justice added Valium to the federal list by publication in the Federal Register. The Washington State Board of Pharmacy did nothing, and after the expiration of 30days, Valium became a controlled substance. Subsequently, the Board of Pharmacy notified all of the county prosecuting attorneys of the addition of Valium to the list.
The defendant moved to have the charges dismissed on the ground that the State failed to allege a crime; i.e., possession of Valium was not a state crime because the procedure purportedly used to make it so was invalid. The trial court denied the defendant’s motion to dismiss, so he appealed to the Washington Supreme Court. The Washington Supreme Court reversed the conviction. One of the reasons for the reversal was the unconstitutional delegation of the Legislature’s legislative authority to the United States Department of Justice.
Based on the foregoing, it is believed that the Legislature cannot prospectively adopt changes to the IRC as part of Washington law, and therefore, references to “Internal Revenue Code” in Washington statutes must be of a date certain. If the Legislature wishes to adopt changes to the Internal Revenue Code, it may only do so retroactively. This requires periodic updating of the RCW’s references to the most recent version of the “Internal Revenue Code.”
3.Department of Revenue and Washington State Legislature
(a)Department of Revenue’s “Housekeeping Bill”
It is understood that the Legislature does not relish having a separate bill introduced each session or so to update the IRC reference date in Title11, RCW83.100 and RCW83.110. In the past, when the Washington State Bar Association (“WSBA”) sponsored such a bill, its lobbyist had to find a senator or representative to introduce the bill, or to tack it onto another bill. As of the 2001 session of the Legislature, DOR agreed to include the updates in its regular “housekeeping bill,” with the understanding that DOR could terminate that agreement at any time.
(b)Alternatives
The Department of Revenue and Governor Locke are considering the situation and may request the 2002 Session of Legislature to take up the matter. Further, a senator or representative could introduce a bill. Other possibilities that have been mentioned (and it is understood the Legislature is investigating) are:
(i)Do nothing; or
(ii)Adopt a “stand alone” Washington estate tax.
(c)Background
(i)IRC Reference Date. It is relatively clear that the Washington estate tax and Washington GST tax respectively equal the federal state death tax credit and federal GST tax state credit, as determined under the IRC as in effect on January1, 2001. For example, the January1,2001 date applies to the definitions of the “gross estate” and “taxable estate,” tax rates, exemptions, exclusions and deductions used in determining the Washington estate and GST taxes, regardless of Congressional amendments enacted after that date.
(ii)Initiative No.402. DOR is aware of the issues generated by the Act and has undertaken a study to review, interalia, the potential revenue loss if the State adopts the federal changes. It is also considering (1)the intent of the voters when they approved Initiative No.402 on November3, 1981, Chapter7, Washington Session Laws, 1981, 2dEx. Sess., which repealed the Washington inheritance tax and substituted the current Washington estate “pick-up” tax effective for decedents dying on or after January1, 1982; and (2)the possibility of litigation if the voter’s intent is not carried out.
In construing the effective date provisions of InitiativeNo.402, the Washington Supreme Court said, “In interpreting Initiative402, we must look to the voter’s intent and the language of the Initiative as the average informed voter read it.” In re the Estate of RobertB. Hitchman, 100Wn.2d 464, at 467 (1983).
The Washington Supreme Court also stated in Lynchv. State, 19Wn.2d 802 (1944):
In determining the meaning of legislation enacted through initiative or referendum, the courts have a right to look to, and may consider, the published arguments made in connection with the submission of such measures to the vote of the electorate. [Citations omitted.] We thus have positive evidence of what the people intended when they voted to adopt the referendum measure.
19Wn.2d at812.
In opposition to the repeal of the Washington inheritance tax and the adoption of Washington estate “pickup” tax, the opponents to passage of Initiative No.402 stated in the Washington Secretary of State’s Official Voters Pamphlet for the November3, 1981, general election:
LOCALNOT FEDERALCONTROL
Do you want Washington, D.C. to determine our state tax levels? That is exactly what would happen if 402 passes. The amount of Washington’s inheritance tax would be determined by the IRS and Congress. Let’s keep control. 402 is the wrong approach, at the wrong time, for the wrong reasons.
Wash. Sect’y. of State, Official Voters Pamphlet - Nov.3, 1981 General Election, at p.3.
The official ballot title and explanatory statement for Initiative No.402 were written by the Washington Attorney General as required by law. The official ballot title was:
OFFICIAL BALLOT TITLE:
Shall inheritance and gift taxes be abolished, and state death taxes be restricted to the federal estate tax credit allowed?
Wash. Sect’y. of State, Official Voters Pamphlet - Nov. 3, 1981 General Election, at p.2.
With respect to the effect of the adoption of Initiative No.402, the Attorney General’s explanatory statement provided:
The effect of Initiative402, if approved into law:
This initiative would repeal the state’s existing inheritance and gift tax laws and would substitute, in their stead, a tax on the transfer of the net estate of a resident decedent and on the transfer of certain instate property of a nonresident decedent. Only estates liable for federal estate tax would be subject to tax under the initiative and the amount of the tax would be limited to the credit allowable against the federal tax.
The impact of the initiative on a particular estate transfer would vary depending upon the relationship of the recipient to the decedent. Since the initiative eliminates the distinction between classes of beneficiaries, it will have a lesser impact on beneficiaries more closely related to decedent who receive higher exemptions and lower rates under present state law. The initiative will have a greater impact on unrelated or more distantly related beneficiaries who receive no exemption and pay tax at the highest rate under current state law.
The adoption of the tax contained in the initiative together with recent increases in the federal estate tax exemptions would operate to reduce the number of estates in which transfers are now taxable under present state law, and, in most other cases, to lower the level of taxation on those estates, which remain taxable, below that imposed under the current state rate structure. The amount of the corresponding reduction in tax revenues which would otherwise be collected under the state’s existing inheritance and gift tax laws cannot be estimated with precision.
Wash. Sect’y. of State, Official Voters Pamphlet - Nov. 3, 1981 General Election, at p.3.
4.Legislature’s Power to Amend Initiative Measures
ArticleII, Section1(c) of the Washington State Constitution prohibits the Legislature from amending an initiative measure or referendum measure approved by the voters within two years of enactment, unless such action is approved by twothirds of all of the members elected to each house of the Legislature. Following such twoyear period, such enactments may be amended by the Legislature in the same manner as any other legislation.
One legal theory is by periodically updating the references to the Internal Revenue Code, the Legislature has amended Initiative 402, and therefore, only the Legislature can update the Internal Revenue Code references in RCW 83.100.
A copy of the relevant portions of the Washington Secretary of State’s Official Voters Pamphlet for the November3, 1981 General Election is attached hereto.
5.Washington Estate and GST Tax Revenues
DOR has provided the following revenue figures with respect to receipts from the Washington estate tax and GST taxes. DOR does not separate the two taxes in its accounting system:
Fiscal Year / Receipts1998 / $ 84,019,387
1999 / 68,124,440
2000 / 86,924,455
07/01/2000 to 05/31/2001 / 104,957,418
Washington’s fiscal year is July1 to June30. Accordingly, fiscal year 2001 ends on June30,2001, and fiscal year 2002 commences on July1, 2001, and ends on June 30, 2002.
6.Administrative and Reporting Burdens
Depending on the circumstances, if Washington does not adopt the Act’s changes, and either does nothing or enacts a “stand alone” Washington estate tax, taxpayers may be required to file two estate (or GST) tax returns in cases where there is a filing requirement under both the federal and state tax regimens. Also, DOR will have to design new Washington estate tax and GST tax returns for resident and nonresident taxpayers, and amend the current regulations contained in the Washington Administrative Code. Presumably, an audit and appeal process will have to be instituted as under the old inheritance tax.
There also will be complications where nonresident decedents have taxable property located in Washington. If such a decedent’s state of residence has a “pickup” tax that conforms to the Act’s changes, there may be a mismatching of the credits allowed by Washington and the other state. This could result in an increase of the decedent’s aggregate state and federal estate tax liabilities.
Furthermore, unless Washington conforms its estate and GST tax laws to the federal changes, Washington taxpayers may be: (i)paying taxes and filing returns with the state, but not with the Internal Revenue Service; and (ii)in the aggregate, paying more federal and state transfer taxes than under what would otherwise be due under post-Act law.
D.WASHINGTON ESTATE TAX vs. FEDERAL ESTATE TAX
1.Federal Effective Dates and Sunset Provisions
(a)Passage of the Act
The Act passed Congress on May26, 2001, by a vote in the House of Representatives of 240 to 154, and in the Senate of 58 to 33. The President signed the Act into law on June7, 2001.
(b)Estate, Gift and GenerationSkipping Section of the Act
SubtitleA through SubtitleI of TitleV of the Act (Sections501-581) deals with the federal estate, gift and GST taxes. Those sections also deal with the income tax “stepup,” “step-down,” and “carryover” basis rules.
(c)Sunset Provisions or “Back to the Future”
Due to the Congressional Budget Act and the Byrd Amendment (2U.S.C. §§642644), Section901(a)(2) of the Act “sunsets” the amendments made to the IRC by Sections501-581 of the Act on December31, 2010. Accordingly, on January1, 2011, the IRC as in effect prior to its modification by SectionV of the Act will be reinstated, i.e., as under pre-Act law. The federal estate tax exemption will be $1,000,000 (as it would have been in 2006 under pre-Act law). In essence, the sunset provision results in the total repeal of the federal estate tax and GST tax for the one-year period of January1, 2010 to December31, 2010 (the “Window Period”).
In the United States Senate, there is a rule known as the “Byrd Rule,” named after Senator RobertC. Byrd (Democrat of West Virginia). Under certain circumstances, the rule effectively requires legislation such as the Act to “sunset” after ten years, unless in enacting the legislation, the Senate approved the bill by three-fifths of the membership (60 senators if no seats are vacant). There were not enough votes in the Senate to override the Byrd Rule (58 senators voting “yes” to the Act), so the sunset provision applied to the Act. The House has no such rule.
The Act does not repeal the gift tax, but reduces the rate of gift tax and increases the exclusion amount. It is understood that the gift tax was retained in order to discourage “income shifting” and to “make the numbers” work. In 2010, the maximum gift tax rate of 35% will equal the maximum income tax rate. The amendments made to the gift tax are also set to “sunset” on December31, 2010, and the gift tax reverts to its pre-Act form, i.e., the gift tax exclusion rises to $1,000,000 (as it would have in 2006 under pre-Act law), and the top rate is 55% (with the 5% surtax for estates between $10,000,000 and $17,184,000). The surtax also applies to the estate tax when reinstated in 2011. Similarly, the GST tax reverts to its pre-Act 55% flat rate and a $1,060,000 exemption (indexed for inflation). In enacting the legislation, the backers hoped that a future Congress would make the Act’s changes permanent. [N.B., Washington does not have a gift tax or income tax.]
Under the Act, effective January1, 2002, the federal gift tax exemption increases to $1,000,000, and the maximum gift tax rate begins decreasing, along with the decrease (and eventual elimination) of the maximum estate tax and GST tax rates:
MAXIMUM RATES
CALENDAR YEAR / PRE-ACT / POST-ACT2001 / 55%** / 55%**
2002 / 55% / 50%
2003 / 55% / 49%
2004 / 55% / 48%
2005 / 55% / 47%
2006 / 55% / 46%
2007 / 55% / 45%
2008 / 55% / 44%
2009 / 55% / 45%
2010 / 55% / 0%*/35%*
2011 and thereafter / 55%** / 55%**
* Estate and GST tax rates are -0-, and maximum Gift Tax rate is 35%.
** Plus the 5% surtax.
ESTATE AND GIFT TAXAPPLICABLE EXCLUSION AMOUNT
CALENDAR YEAR / PRE-ACTESTATE & GIFT TAX / POST-ACT
ESTATE TAX / POST-ACT
GIFT TAX
2001 / $675,000 / $675,000 / $675,000
2002 / 700,000 / 1,000,000 / 1,000,000
2003 / 700,000 / 1,000,000 / 1,000,000
2004 / 850,000 / 1,500,000 / 1,000,000
2005 / 850,000 / 1,500,000 / 1,000,000
2006 / 1,000,000 / 2,000,000 / 1,000,000
2007 / 1,000,000 / 2,000,000 / 1,000,000
2008 / 1,000,000 / 2,000,000 / 1,000,000
2009 / 1,000,000 / 3,500,000 / 1,000,000
2010 / 1,000,000 / Repealed* / 1,000,000
2011 and thereafter / 1,000,000 / 1,000,000 / 1,000,000
* Estate and GST taxes are repealed for the year 2010.