Washington State has undergone a significant shift in its tax landscape over just a few legislative sessions. The state has enacted a capital gains tax, imposed a new income tax on high earners, and restructured estate tax rates. For high-net-worth residents — particularly those holding significant real estate portfolios or operating closely held businesses — these changes create real planning considerations that deserve thoughtful attention.
This article provides a high-level overview of the current Washington tax environment and discusses several estate planning and asset-structuring tools that, when used together, can help you respond to the new landscape. It is intended as general information only, not legal advice. Every family's situation is different, and the right combination of tools depends on careful analysis of your specific circumstances and goals.
A Brief Overview of the Tax Changes
Washington's capital gains tax, originally enacted in 2022 at a flat 7% on long-term gains above an exemption threshold, has become more aggressive. Under SB 5813, signed by Governor Ferguson on May 20, 2025, a graduated structure now applies, with higher rates on larger gains. Direct real estate sales remain exempt — but sales of interests in entities holding real estate (LLCs, partnerships, S corporations) may not enjoy the same exemption, which is why the structure of ownership matters.
ESSB 6346, signed into law on March 24, 2026, imposes a 9.9% income tax on Washington residents with more than $1 million in annual income, taking effect January 1, 2028. Non-residents are also subject to the tax on Washington-source income, including rental income from Washington real estate. Income allocated from pass-through entities is included, and a married couple shares a single $1 million deduction.
On the estate tax side, the individual exemption increased from $2.193 million to $3 million effective July 1, 2025, but SB 5813 also increased the top marginal estate tax rate from 20% to 35% for taxable amounts exceeding $9 million above the exemption. SB 6347 rolled back the rates to the prior graduated rate structure ending at 20% and retains the $3 million exemption but effectively freezes it — so the exemption will not adjust for inflation unless the legislature acts again. Washington also does not allow portability of the estate tax exemption between spouses, which can cause a married couple to lose one spouse's $3 million exemption without proper planning.
Why Entity Structure Matters More Than Ever
One of the most important legal considerations in the new tax environment is how you hold your assets. The Washington capital gains tax exempts direct real estate sales, but the exemption does not necessarily extend to sales of equity interests in entities that hold real estate. For investors who hold property through LLCs, partnerships, or S corporations, this distinction can have significant tax consequences at the time of sale.
A thoughtful entity review can help you understand the potential implications of your current structure and evaluate whether restructuring makes sense before a sale event. This is not a one-size-fits-all analysis — the right approach depends on factors including your long-term plans, liability considerations, income tax treatment, succession planning, and the terms of any existing operating or partnership agreements.
Out-of-State Trust Structures
Several states — including Nevada, South Dakota, Delaware, Wyoming, and Alaska — offer trust laws that can provide meaningful advantages over Washington for holding assets long-term. These advantages may include favorable asset protection rules, the ability to create dynasty trusts that last for multiple generations, and in many cases, no state income tax on undistributed trust income. A trust's situs (its legal "home") can be established in these states with a resident trustee or co-trustee, even if the grantor lives in Washington.
It is important to understand that not all out-of-state trusts provide the same result under Washington's new income tax. The distinction between grantor and non-grantor trusts, and between incomplete-gift and completed-gift trusts, can be outcome-determinative. Generally speaking, a completed-gift non-grantor irrevocable trust established in a favorable state — with undistributed income retained at the trust level — can place income outside the reach of Washington's income tax. Working with an attorney to understand how your specific structure is characterized is essential before relying on these benefits.
The 1031 Exchange as One Tool Among Several
For real estate investors looking to reposition assets — whether to reduce Washington exposure, diversify geographically, or transition toward more passive income — the 1031 exchange remains one of the most powerful tools available. A 1031 exchange does not require you to acquire replacement property in the same state, so a Washington investor can exchange into property in Texas, Nevada, Florida, or any other state. This defers federal capital gains tax and the 3.8% Net Investment Income Tax, and because the gain is deferred, it also stays outside Washington's income tax calculation as long as the deferral is maintained.
The 45-day identification period and 180-day exchange period are statutory and cannot be extended. For this reason, careful advance planning and coordination with an experienced qualified intermediary are critical. Jeff provides qualified intermediary services through his affiliated company, Olympic Exchange Accommodators. You can learn more about the exchange process on our Real Estate and Business Transactions page or visit the Olympic Exchange website directly.
The Role of Life Insurance in Estate Planning
Even with careful planning, some estate tax liability may be unavoidable — particularly for larger estates subject to both Washington and federal estate tax. A $10 million taxable estate above the exemption could face several million dollars in combined estate taxes at the highest marginal rates. Without liquidity, heirs may be forced to sell real estate or business interests under time pressure to pay those taxes.
This is where life insurance, held in an irrevocable life insurance trust (ILIT), can play a meaningful role. A properly structured ILIT-owned policy can provide liquidity outside the taxable estate — funds that are available to pay estate taxes without forcing a sale of appreciated assets. For families with significant real estate or business holdings, this can be the difference between heirs inheriting intact portfolios and being forced to liquidate at unfavorable times.
Bringing the Tools Together
Consider a Washington investor who owns a $3 million apartment building that has appreciated significantly, generates over $200,000 in annual rental income, and is in their early 60s. This investor is concerned about the new income tax, capital gains exposure on a potential sale, and eventual estate tax liability. A coordinated strategy might involve executing a 1031 exchange into replacement property in a more tax-friendly state, holding that replacement property in a completed-gift non-grantor irrevocable trust established in a favorable jurisdiction, and establishing an ILIT funded with life insurance sized to address remaining estate tax exposure.
The result of such a coordinated plan — if executed properly — can include deferred capital gains, rental income repositioned outside Washington's income tax reach, assets protected from certain creditor claims, and estate tax liability addressed with insurance proceeds rather than forced asset liquidation. Of course, these outcomes depend heavily on how each piece is structured and implemented, which is why working with an integrated team of professionals matters so much.
If You Are Considering Leaving Washington
For investors seriously considering a move out of Washington, the new income tax legislation defines residency as domicile in Washington or maintaining a place of abode and being present in the state more than 183 days per year. To clearly establish non-residency, an individual generally needs to have no permanent abode in Washington, maintain a permanent abode elsewhere, and spend 30 or fewer days in Washington during the tax year. This is a dramatic lifestyle change and is not right for everyone, but for investors with substantial Washington-source income and portable businesses, it is worth understanding the rules well before the income tax takes effect in 2028.
The Time to Plan Is Now
Washington's tax landscape has shifted more quickly than at any point in the state's recent history. The capital gains tax is settled law. Estate tax rates are restructured. A state income tax on high earners is enacted. For real estate investors and high-net-worth individuals, the window for proactive planning is now — not after the tax bills arrive. Each of the tools described above — entity restructuring, out-of-state trusts, 1031 exchanges, and ILITs — is well-established and has been used by Washington families for decades. What is new is the urgency of bringing them together into a coordinated plan that responds to the current environment.
If you would like to discuss how these changes affect your specific situation, Jeff Helsdon would be glad to have that conversation. With decades of experience in estate planning, real estate, and 1031 exchanges — and no consultation fee — it is a conversation worth having.
