Estate Planning for Your Washington State Small Business

When small business owners create a succession plan, they tend to focus on one topic: who will take the reins when I die?  While this is the most important issue, there are other matters to address.  For small business owners, Washington estate taxes can become a major hurdle due to the assets that compromise their estates.

A Washington small business owner who dies owning a business valued at $3 million, and no other significant assets, puts his or her heirs in quite the bind.  Washington State imposes an estate tax on all estates valued over $2.193 million for 2018.  In this situation, the business owner’s estate will owe $80,700 in estate taxes to Washington.  While the value of the estate is large enough to cover the debt, liquidity could be a major problem.  The estate will either have to sell the business or some of its assets to pay the estate tax, or borrow to satisfy the debt.  In either situation, the small business owner has put his or her heirs into an unintended situation.

One possible solution to this problem is the Qualified Family-Owned Business Interest (QFOBI) deduction.  Under Washington estate tax law[1], if a small business meets the QFOBI requirements, the estate can take a deduction up to $2.5 million.  The deduction requires the business interest to comprise at least 50% of the business owner’s estate, and the interest pass to a “qualified heir.”  A “qualified heir” is an ancestor of the business owner, a spouse, a child, or spouse of a child.   In the example above, if the business is a QFOBI, the overall estate would be reduced to $500,000.  The estate would be completely exempt from any Washington estate taxes and the beneficiaries could carry on the business without any additional financial hardship.

When putting together an estate plan, it is crucial to know all of the resources at your disposal.  For small business owners, the QFOBI can be an important tool.  There are several detailed requirements for a small business to qualify for the deduction, so planning ahead is key.


[1] The QFOBI deduction is only available for Washington State estate tax purposes.  There is no corresponding deduction for Federal estate tax purposes.

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