Washington’s Evolving Tax Rules: Strategies for High-Net-Worth Residents

Estate Tax: A Course Correction

For Washington residents, the estate tax landscape has shifted twice in the span of a year. In 2025, the legislature raised the top marginal rate from 20% to 35% – briefly giving Washington the highest estate tax rate in the nation. Encouragingly, lawmakers reversed course in 2026, rolling back that increase effective July 1 of this year.¹  

The $3 million estate tax exemption established in 2025 remains in place, with future increases tied to inflation. Estates valued below this threshold owe no Washington estate tax. For estates above that amount, the graduated rate structure now ranges from 10% to 20%, a meaningful reduction from the 35% top rate that briefly applied.

Why the change? Lawmakers acknowledged that the 35% rate – far higher than any other state – was motivating high-net-worth residents to relocate. The rollback passed with broad support as part of tax negotiations during the most recent legislative session.

Source: Washington State Department of Revenue (effective July 1, 2026, pending signature)

Navigating Washington’s Estate Tax: Key Strategies

Even with the rate rollback, thoughtful estate planning remains important for Washington residents. Before developing a state-specific plan, it’s important to start with core estate tax mitigation strategies. These include both lifetime gifting and effectively using trusts  (such as SLATs).

For Washington residents, there are also several tailored strategies worth considering:

• Credit Shelter Trusts. In contrast to federal rules, Washington does not allow ‘exemption portability’ for married couples. When one spouse pre-deceases the other, their $3 million estate tax exemption is usually lost. Credit Shelter Trusts can ensure that this exemption is preserved, doubling the amount a couple can protect.
• Deathbed Gifting. Gifting does not impact an individual’s Washington estate tax exemption limit. Further, the state does not have a ‘lookback’ period during which gifts can be clawed back into an estate. Therefore, assets gifted shortly before death are completely exempt from Washington’s estate tax.
• QFOBI Deduction. In certain circumstances, Washington’s Qualified Family-Owned Business Interest (QFOBI) deduction can allow owners of closely held businesses to significantly increase their overall estate exemption. When combined with the standard $3 million exemption, this deduction can allow a qualifying business owner to shield up to $6 million of total assets.

For Washington residents concerned about estate taxes, these state-specific strategies may offer benefits. However, formal changes to your legacy strategy should only be made after consulting with an estate planning attorney and evaluating how they interact with your federal tax burden.

Capital Gains Tax: Holding Steady

Unlike the estate tax, Washington’s capital gains tax did not see changes during recent legislative debates. Since 2022, Washington has had a capital gains tax rate of 7% on long-term gains. In 2025, the state implemented an additional 2.9% levy on taxable gains exceeding $1 million, resulting in a top marginal rate of 9.9%.

These rates are assessed on long-term gains over the state’s annual deduction amount. This deduction is $278,000 for 2025 and is adjusted annually for inflation. Washington residents can avoid paying state capital gains taxes entirely by keeping long-term gains below that limit.

Source: Washington State DOR 

Navigating Washington’s Capital Gains Tax: Key Strategies

Because Washington does not tax short-term gains, only long-term losses can be used to offset state capital gains taxes. This means that investors cannot rely on the same tax-loss harvesting approaches commonly used to mitigate federal taxes, such as accumulating losses on actively traded positions during market volatility.

Nonetheless, there are still state-specific strategies that limit your exposure to Washington capital gains taxes:

• Utilizing Specific Exemptions. Gains from the sale of real estate are specifically exempt from the tax. Additionally, the Qualified Family-Owned Small Business (QFOSB) deduction can eliminate capital gains taxes entirely on the sale of certain businesses.
• Installment Sales. Breaking up asset sales over time has always been useful, but staying below the additional surcharge makes this strategy even more important. Structuring a large transaction as an installment sale over multiple years can help you stay below either the annual deduction amount or the $1 million threshold.
• Gifting Appreciated Assets. If sales are being used to fund gifts, it can be more efficient to give appreciated assets to a beneficiary directly. For instance, gifting assets to a family member with more room in their remaining deduction may reduce overall capital gains taxes paid.

Washington also offers a charitable deduction of up to $111,000 on donations that exceed the annual exemption amount. In other words, Washington residents would need to donate $389,000 to charity in a single year to capture the full deduction. Contributing a lump sum to a Donor-Advised Fund (DAF) could be one way to capture that deduction in a high-tax year.

The Millionaires Tax: A New Chapter

Perhaps the most significant development from the 2026 legislative session was the passage of Senate Bill 6346 – commonly referred to as the “Millionaires Tax.” For the first time in nearly a century, Washington will impose a tax on personal income. The new tax applies a 9.9% rate to household income exceeding $1 million per year, set to become effective in 2028.

It’s worth noting that the Millionaires Tax faces significant legal and political hurdles before it takes effect. Based on a 1933 Washington Supreme Court ruling, an income tax likely violates the state constitution. Supporters of the new tax argue that the court should revisit this long-established precedent, while opponents expect to challenge the law in court.

Navigating the Millionaires Tax: Key Strategies

Given the uncertainty surrounding Washington’s new income tax, it’s important to balance preparation with flexibility. With that said, there are several strategies worth considering for those who may be affected by the new levy:

• Timing Income Recognition. For individuals with control over the timing of income – such as business owners, executives with deferred compensation, or those planning a business sale – recognizing income before 2028 could potentially avoid the new tax entirely.
  
• The Pass-Through Entity Tax Election. For business owners with income from S-corps, partnerships, or LLCs, the new law includes an option to have the business pay the tax on their behalf. Because federal law limits deductions for personal state tax payments, this election can result in meaningful federal tax savings.
• Spreading Income Over Time. For executives or business owners with flexibility in how compensation is structured, spreading income across multiple years can help stay below the $1 million annual threshold. This could include negotiating equity awards with multi-year vesting schedules or utilizing deferred compensation arrangements.

For Washington residents who may be subject to the Millionaires Tax, thoughtful planning in the years ahead can help manage the potential impact. But given the likelihood of legal challenges, it is prudent to avoid irreversible decisions until the law’s future becomes clear.

Conclusion: The Residency Question

Washington’s tax environment has seen remarkable changes in a short period. However, the long-term trend appears to be toward new revenue measures and higher taxation. In the face of that trend, Washington residents have a more drastic option to consider: leaving the state entirely.

While recent tax changes are unlikely to be the deciding factor in any move, they could influence residency decisions. That’s especially true for individuals with properties in multiple states or those looking to retire.

Whether or not you decide to remain in Washington, effective tax planning is key to mitigating the amount you pay. While Badgley does not offer tax guidance, we implement tax-aware investment strategies. We also work closely with your accountant to develop a comprehensive tax plan.

For Washington residents, we invite you to contact our team to discuss how these strategies might apply to your specific financial situation. As the tax environment evolves, we are here to help ensure that your wealth strategy adapts accordingly.

[1]SB 6347 - 2025-26 pending signature.