Estate Tax Mitigation Strategies for High-Income Families in California and Washington

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

The estate tax mitigation strategies that matter most for a high-income family are a credit shelter trust, an irrevocable life insurance trust, steady annual gifting (including 529 superfunding), and keeping the step-up in basis on appreciated stock. For 2026 the federal estate tax only reaches estates above $15,000,000 per person, so a California couple with a $1 million income usually has years before it applies. A Washington couple can owe state estate tax on an estate above $3,000,000, which many dual-income tech and physician households already pass once life insurance is counted.

Estate tax avoidance in this sense is legal planning: using the exclusions, deductions and trusts the law provides. This guide shows which strategies fit a W-2 family with young children in California or Washington, with worked numbers for each state.

The 2026 estate tax rules a CA or WA family faces

Three layers of rules can apply, and they reach very different households.

The federal exclusion of $15,000,000 for 2026 was set by the 2025 tax law (P.L. 119-21) and is indexed for inflation from 2027 (IRS, What’s new, estate and gift tax). The old warning that the exemption “drops to about $7 million in 2026” is obsolete; that sunset never happened. The 40% top rate is in IRC §2001(c). Washington’s exclusions and rate table are on the Department of Revenue estate tax tables. California’s only estate tax (Rev. & Tax. Code §13302) equals a federal credit for state death taxes, and that credit no longer applies to current deaths, so it collects nothing.

Why Washington families need a plan years before California families

Two features of Washington law change the math. First, the exclusion is $3,000,000 per person, a fifth of the federal figure. Second, Washington does not allow portability. The Department of Revenue states that “Washington law does not have, nor does it incorporate, the federal provisions of portability for estate tax” (WA DOR estate tax FAQ). If the first spouse leaves everything outright to the survivor, the first spouse’s $3,000,000 Washington exclusion is simply lost.

The federal system is more forgiving. A surviving spouse can keep the first spouse’s unused federal exclusion, but only if the executor files a timely Form 706 to elect it, even when no tax is due (IRS estate tax FAQs). Many families skip that filing because nothing is owed, and give up up to $15,000,000 of future exclusion.

Worked example: a Bellevue couple with $1.4 million of W-2 income

Assumptions (illustrative): both spouses are W-2 employees, one at a large tech company and one a hospital physician. All assets are community property. Home equity $2.0M, brokerage account with vested RSU shares $1.5M, 401(k)s $1.0M, cash $0.3M, for $4.8M. Each spouse owns a $3.0M term life policy on their own life. Both deaths happen after June 30, 2026, so the $3,000,000 Washington exclusion applies. Debts and funeral costs are ignored.

Plan A: simple wills, everything to the survivor

At the first death, everything passes to the surviving spouse. The marital deduction means no tax (Washington allows the marital deduction and QTIP election, per the DOR FAQ above). The survivor now holds $4.8M of assets plus the first spouse’s $3.0M insurance payout, and still owns a $3.0M policy that will be counted at their own death. Gross estate at the second death: $10.8M.

Washington taxable estate: $10.8M minus the $3.0M exclusion = $7.8M. Using the DOR table, tax = $1,100,000 plus 19.5% of the $800,000 above $7,000,000 = $1,256,000. Federal estate tax: $0, since $10.8M is below $15,000,000.

Plan B: credit shelter trust plus an irrevocable life insurance trust

• An irrevocable life insurance trust (ILIT) buys and owns both policies from the start, so neither payout is in either spouse’s estate. Moving an existing policy into the trust can still pull the payout back into the estate if the insured dies within three years of the transfer (IRC §2035), which is why new policies are often bought by the trust directly.
• At the first death, the deceased spouse’s half of the brokerage, home and cash (about $1.9M) goes into a credit shelter trust that pays for the survivor and children but is not in the survivor’s estate. Both 401(k)s ($1.0M) pass to the survivor by beneficiary designation and can be rolled over.

Survivor’s estate at the second death: their own $1.9M half of the home, brokerage and cash plus the $1.0M of 401(k)s = $2.9M, below the $3,000,000 exclusion. Washington tax at today’s values: $0, compared with $1,256,000 under Plan A. Growth can push the survivor above the threshold over time, which is why the plan gets reviewed every few years, but the trust keeps the first spouse’s share and its growth out of the survivor’s estate.

The estate tax mitigation strategies that fit W-2 families with young children

1. Credit shelter trust (essential in Washington)

Your wills or revocable trust divide the first spouse’s share so that an amount up to the state exclusion goes into a trust instead of outright to the survivor. In Washington, with no portability, this is the standard way to use both spouses’ exclusions. In California it is optional, because federal portability does much of the same job without a trust, though some families still use one for control and creditor reasons.

2. Irrevocable life insurance trust

Many families with young children carry large term policies, for example $2M to $5M per parent. Policies you own are counted in your estate (IRC §2042). For a Washington family, that alone can cross the $3,000,000 line. An ILIT also gives the money to a trustee rather than to a minor child.

3. Annual exclusion gifts and 529 superfunding

For 2026 each parent can give $19,000 per recipient without using any lifetime exclusion, so a couple can give $38,000 per child. With two children, that is $76,000 a year, or $760,000 over ten years if the exclusion stayed at the 2026 amount, before growth. A couple can also front-load five years of exclusions into a 529 plan: up to $190,000 per child in a single year, with Form 709 filed to make the election (Form 709 instructions). California gives no state deduction for 529 contributions, but earnings grow free of California tax when used for qualified higher education expenses.

In Washington, outright lifetime gifts are generally not added back to the Washington taxable estate, apart from gift tax paid and certain retained-interest transfers made within three years of death (WA DOR FAQ). At a 19.5% marginal Washington rate, moving $760,000 out of the estate could cut that family’s Washington estate tax by about $148,200, assuming the estate stays in that bracket.

4. Large lifetime gifts to a trust (SLAT or IDGT)

Once a family’s projected estate passes $30 million, gifts that use part of the $15,000,000 federal exclusion move future growth out of the estate. Common tools are a spousal lifetime access trust (SLAT) and an intentionally defective grantor trust, where the parents keep paying the trust’s income tax. These trusts are irrevocable and complex. For most families in our range they are a later decision, not a first one.

5. Keep the step-up in basis on appreciated stock

Heirs generally take a cost basis equal to the asset’s value on the date of death, not what the parents paid. California and Washington are both community property states, and when one spouse dies, the total fair market value of community property, including the survivor’s half, generally becomes the basis of the entire property (IRS Publication 555). Gifting low-basis RSU shares during life gives that up, because the recipient keeps the parent’s original basis. That is why many families give cash or high-basis assets and hold low-basis shares.

6. Name the right beneficiaries

Retirement accounts and life insurance pass by beneficiary form, not by will. Naming a minor child directly usually forces a court-supervised guardianship or a custodial account the child controls at 18 or 21 (see what happens to a UTMA at 21). Naming a trust keeps a trustee in charge until the age you choose. Our guide to naming a trust as beneficiary of a brokerage account walks through the forms.

Worked example: a Palo Alto couple with $1.1 million of income

Assumptions (illustrative): net worth $9M today, including $3.0M of employer stock with a $600,000 basis. Federal estate tax today: $0, since $9M is far below the $30,000,000 a married couple can shelter with portability.

The estate tax question is about the future. If net worth grew at 6% a year for 25 years, $9M would reach about $38.6M. Measured against today’s $30,000,000, the excess of $8.6M taxed at 40% would be about $3.4M. Inflation indexing of the exclusion from 2027 will narrow that gap, so the real figure is likely lower. That is the signal to plan gifting and trusts in the next decade, not this year.

The more immediate tax is income tax. If the first spouse dies holding the $3.0M of stock as community property, the whole position’s basis generally steps up to $3.0M, so the survivor can generally sell without tax on the $2.4M gain. At top 2025 and 2026 rates (20% federal long-term gain rate, 3.8% net investment income tax, and California’s 13.3% top rate for 2025, which has no lower rate for capital gains), that gain would otherwise cost roughly $890,400, assuming the whole gain is taxed at those top rates. Keeping the community property character documented in your trust is a short conversation with your attorney.

Common mistakes we see in high-income families

• Assuming Washington has no death taxes. Washington has no wage income tax in 2026, but its estate tax starts at $3,000,000 per person, and a new 9.9% tax on income over $1,000,000 starts in 2028.
• Owning large life insurance policies personally. The payout lands in the estate of the insured or the surviving spouse.
• Skipping Form 706 after the first death because no tax is due, losing the federal portability election.
• Planning around the expired “2026 sunset”. Some families made rushed irrevocable gifts in 2024 and 2025 to beat a cut that did not happen.
• Gifting appreciated shares to children and giving up the step-up in basis.
• A revocable trust that was never funded. Accounts still titled in your own names can end up in probate in California or Washington regardless of what the trust says.

What to document for your children

Trusts decide who gets the money and when. They do not explain why you built the plan the way you did. A short letter kept with the trust, covering why the trustee holds the money until a given age, what you hoped the 529 money would make possible, and how you think about giving, is often the part children value most. As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?” Our family governance work helps families write this down in the FamilyKnowledge® Library alongside the legal documents.

Frequently asked questions

Do you pay taxes on inherited money?

In most cases, no. IRS Publication 525 says property you receive as a gift, bequest or inheritance generally is not included in your income. Income the property earns afterwards (interest, dividends, rent) is taxable, and withdrawals from an inherited traditional IRA or 401(k) are taxed as ordinary income. Any federal or Washington estate tax is generally paid by the estate before assets are distributed, not by the heirs. Source: IRS Pub 525.

Can you avoid estate tax entirely?

For 2026, a married couple can pass up to $30,000,000 free of federal estate tax with portability, so most families in our range owe no federal tax. Washington residents face a $3,000,000 exclusion per person, and a credit shelter trust, life insurance trust and lifetime gifts can bring a typical dual-income estate down to that level. Larger estates can usually reduce the tax, not erase it.

When should we see an estate attorney?

As soon as you have a child, own a home, or carry life insurance above about $2 million. Bring a list of every account, its titling and its beneficiaries, plus your insurance policies. Ask them to show you, in writing, what happens at the first death and at the second.

Your next step

Add up your estate the way the tax authorities will: home equity, brokerage and RSU shares, retirement accounts, and the face value of every life insurance policy you own. If you live in Washington and that total is above $3,000,000, ask your attorney whether your documents include a credit shelter trust and whether an ILIT should own your policies. Our estate planning and tax management teams at the Age Five Family Office™ coordinate this work with your attorney as part of the Tax & Wealth Assessment.

This is general education, not individual tax or legal advice. The right structure depends on your family’s full picture and your attorney’s review.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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