In the Matter of the Estate of Helen M. Hambleton. Steve Hambleton, as Personal Representative, Respondent ,
The Department of Revenue, Appellant. In the Matter of the Estate of Jessie Campbell Macbride. Thomas A. Macbride III et al., as Personal Representatives, Appellants ,
The Department of Revenue, Respondent
Argued February 25, 2014
Reconsideration denied January 9, 2015.
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Appeal from Clark County Superior Court. 07-4-00574-0. Honorable David E. Gregerson.
Robert W. Ferguson, Attorney General, and David M. Hankins and Charles Zalesky, Assistants, for appellant Department of Revenue.
Rhys M. Farren, Dirk J. Giseburt, Richard A. Klobucher, and Roger A. Leishman (of Davis Wright Tremaine LLP ), for appellants Macbride.
Thomas M. Culbertson and Laura J. Black (of Lukins & Annis PS ), for respondent Hambleton.
Robert W. Ferguson, Attorney General, and David M. Hankins and Charles Zalesky, Assistants, for respondent Department of Revenue.
Seth L. Cooper and Thomas L. Cooper on behalf of the Doris H. McInniis QTIP Trust, amicus curiae.
Howard M. Goodfriend on behalf of Dot Foods, Inc., amicus curiae.
AUTHOR: Justice Charles K. Wiggins. WE CONCUR: Chief Justice Barbara A. Madsen, Justice Charles W. Johnson, Justice Susan Owens, Justice Mary E. Fairhurst, Justice Debra L. Stephens, Justice Steven C. Gonzá lez, Justice Sheryl Gordon McCloud, Stephen J. Dwyer, Justice Pro Tem.
[181 Wn.2d 809] Wiggins,
¶ 1 In 2013, the legislature amended the Estate and Transfer Tax Act, chapter 83.100 RCW, in response to our decision in In re Estate of Bracken, 175 Wn.2d 549, 290 P.3d
in which we narrowly construed the term " transfer." The amendment allows the Department of Revenue (DOR) to tax qualified terminable interest property (QTIP) as part of a surviving spouse's estate. A QTIP trust is created by a deceased spouse and gives the surviving spouse a life interest in the income or use of trust property. See 26 U.S.C. § 2056(b)(7)(B)(i)-(ii). The advantage of QTIP trusts is that no estate tax is paid on the death of the first spouse; the property is taxed only upon the death of the surviving spouse.
¶ 2 In these consolidated cases, the estates of Hambleton and Macbride (collectively Estates) challenge the amendment on a variety of grounds. We reject the Estates' challenges and reverse summary judgment in In re Estate of Hambleton, No. 89419-1, and affirm the summary judgment in In re Estate of Macbride, No. 89500-7.
[181 Wn.2d 810] Background
¶ 3 A brief discussion of the history of Washington's current estate tax law, the Bracken decision, 175 Wn.2d 549, and the facts of the consolidated cases places this case in context.
Washington Estate Tax Law Pre-Bracken
¶ 4 For many years, Washington did not have an independent estate tax. Instead, Washington participated in a federal tax sharing system, referred to as " pickup" taxes. Id. at 557. Under the pickup tax system, the federal government became the principal estate tax collector in exchange for sharing with states a generous percentage of the amount collected. Id. In 2001, Congress passed legislation that gradually eliminated the pickup tax system. Id. at 558. Our legislature responded by " revis[ing] existing statutes to tie estate taxation to provisions of the Internal Revenue Code as they existed [under the former pickup tax system], with DOR continuing to collect the same amount of tax as before." Id. at 558-59. We invalidated the revisions and instructed the legislature to either create a stand-alone estate tax or remain under the former pickup tax system. Id. at 559; Estate of Hemphill v. Dep't of Revenue, 153 Wn.2d 544, 551, 105 P.3d 391 (2005).
¶ 5 In 2005, the legislature answered by enacting a stand-alone estate tax, the Estate and Transfer Tax Act (Act). Laws of 2005, ch. 516, § 1. The legislature modeled the stand-alone tax after the federal estate tax regime. See Bracken, 175 Wn.2d at 559. " It incorporates concepts and definitions from federal law and operates almost entirely in tandem with taxable estate and tax calculation and reporting for federal estate tax purposes." Id. For example, the " 'Washington taxable estate' means the federal taxable estate, less: [specified deductions]." Laws of 2005, ch. 516, § 2(13).
[181 Wn.2d 811] ¶ 6 Under federal law, Congress provides a deduction for QTIP trust assets. QTIP is property in a testamentary trust created by a deceased spouse for the benefit of the surviving spouse. The result of the deduction is that " [t]he spouse who dies first controls the final disposition of the property, while allowing the surviving spouse to use the property or receive the income it generates, unreduced by front-end estate taxation." Bracken, 175 Wn.2d at 556. Typically, terminable interests, such as life estates, do not qualify for the marital tax deduction. See id. at 555. However, Congress created an exception for QTIP assets. The effect of the deduction is that the property is ultimately taxed, but the property is not taxed when the first spouse creates the life estate. Id. at 556. The transfer of property is taxed when the second spouse dies and the ultimate beneficiaries become present interest holders. Id.
¶ 7 Estate taxes are excise taxes. West v. Okla. Tax Comm'n, 334 U.S. 717, 727, 68 S.Ct. 1223, 92 L.Ed. 1676 (1948). Whether a tax is an excise tax or a direct tax is significant because the Washington State Constitution imposes a uniformity requirement on direct taxes, but the uniformity requirement does not apply to excise taxes. Const. art. VII, § 1; Dean v. Lehman, 143 Wn.2d 12, 25-26, 18 P.3d 523 (2001). A tax is an " excise" or " transfer" tax if the government is taxing " a particular use or enjoyment
of property or the shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property." Fernandez v. Wiener, 326 U.S. 340, 352, 66 S.Ct. 178, 90 L.Ed. 116 (1945).
¶ 8 The 2005 Act imposed a tax on " every transfer of property located in Washington" and applied prospectively to estates of decedents dying on or after May 17, 2005. Laws of 2005, ch. 516, § § 3(1), 20. Therefore, a transfer (upon which the excise tax operates) must occur on or after May 17, 2005.
[181 Wn.2d 812] Estate of Bracken
¶ 9 In Bracken, we held that DOR overstepped its authority by adopting regulations that taxed QTIP assets when the deceased spouse died before the effective date of the 2005 Act. Bracken, 175 Wn.2d at 554; see Laws of 2005, ch. 516, § 20. In Bracken, the deceased spouses made QTIP elections under federal law before Washington enacted its stand-alone estate tax and the surviving spouses died after the legislature passed the Act. See 175 Wn.2d at 556, 561-62. The estate in Bracken argued that the taxable transfer occurred when the first spouse died (before the Act came into effect), while DOR argued that a taxable transfer occurred when the second spouse died (after the Act came into effect). See id. at 561-63.
¶ 10 We interpreted " transfer" narrowly and reasoned that the only " transfer" occurred at the husbands' deaths when they created the QTIP trusts. See id. at 554, 563. Any transfers that occurred later upon the wives' deaths were fictional. Id. at 554. Therefore, DOR exceeded its authority under the Act, which requires a transfer, by creating regulations that allowed taxation of fictional transfers. Id. According to our interpretation in Bracken, the " real" transfers occurred before the 2005 estate law was enacted. DOR could not tax these transfers because the legislature declared that the Act was prospective only. See Laws of 2005, ch. 516, § 20. The court did not reach alleged constitutional issues because it construed the estate tax to apply only to real transfers. See 175 Wn.2d at 563.
¶ 11 The concurring/dissenting opinion disagreed with the majority's narrow interpretation of " transfer." See id. at 576 (Madsen, C.J., concurring/dissenting). However, the concurring/dissenting opinion still agreed that the legislature did not intend to tax the QTIP, but for reasons differing from the majority. Id. at 594 (Madsen, C.J., concurring/dissenting) (" The 2006 regulations on their face and according [181 Wn.2d 813] to their plain language effectuate the obvious purpose of the legislature's determination to allow a state QTIP election: the surviving spouses' estates are not subject to state estate taxation on federal estate QTIP elections that did not benefit the first spouses' estates on any state estate tax returns by allowing a state marital deduction when the first spouses died." ). The concurring/dissenting justices noted that the legislature could amend the statute if it intended a different result, so long as the amendments did not offend the constitution. Id. at 594-95.
¶ 12 The result of the Bracken decision was that the State could not tax the QTIP trusts created by spouses dying before the Act was enacted because the spouse did not make a state QTIP election. See id. at 554.
¶ 13 In 2013, the legislature responded to Bracken by amending the Act to tax QTIP assets upon the death of the surviving spouse. Laws of 2013, 2d Spec. Sess., ch. 2, § 1. Disagreeing with Bracken 's narrow interpretation of the term " transfer," the legislature noted that under the federal estate tax code " transfer" is " construed broadly and extends to the 'shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property' that occurs at death." Id. § 1(3) (quoting Fernandez, 326 U.S. at 352). The legislature also found that Bracken
(a) Creates an inequity never intended by the legislature because unmarried individuals did not enjoy any similar opportunities to avoid or greatly reduce their potential Washington estate tax liability; and (b) may create disparate treatment between QTIP property and other property transferred
between spouses that is eligible for the marital deduction.
Id. § 1(4). In response to its findings, the legislature broadened the meaning of " transfer" to its " broadest possible meaning consistent with established United States supreme court precedents ... ." Id. § 1(5).
[181 Wn.2d 814] ¶ 14 The legislature intended for the amendments to " apply both prospectively and retroactively to all estates of decedents dying on or after May 17, 2005." Id. § 9. However, the amendments do " not affect any final judgment, no longer subject to appeal, entered by a court of competent jurisdiction before the effective date of this section[, June 14, 2013]." Id. § 10.
¶ 15 The amendment modified the definition of " transfer." The definition of " transfer" now reads, " 'Transfer' means 'transfer' as used in section 2001 of the internal revenue code and includes any shifting upon death of the economic benefit in property or any power or legal privilege incidental to the ownership or enjoyment of property ... ." Id. § 2(12) (italics indicate added language). Section 2001 of the Internal Revenue Code (IRC) uses " transfer" in the following context: " A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." 26 U.S.C. § 2001(a).
¶ 16 The legislature also amended the definition of the " Washington taxable estate." The amended definition is, in relevant part, " the federal taxable estate and includes, but is not limited to, the value of any property included in the gross estate under section 2044 of the internal revenue code, regardless of whether the decedent's interest in such property was acquired before May 17, 2005 ... ." Laws of 2013, 2d Spec. Sess., ch. 2, § 2(14) (italics indicate added language). Section 2044 requires that QTIP assets be included in the value of the surviving spouse's gross estate. See 26 U.S.C. § 2044(a).
¶ 17 The legislature's amendments clarified the intent of the legislature to include QTIP trusts created before 2005 in the surviving spouse's Washington taxable estate (if the surviving ...