Washington's New 9.9% Income Tax on Millionaires: What It Means for Estates and Trusts

Washington has famously lacked a broad-based personal income tax for over a century. That changes in 2028. The passage of ESSB 6346 in the 2026 legislative session creates a 9.9% tax on Washington taxable income exceeding $1,000,000, effective January 1, 2028. For estate planning purposes, the planning window is now — not after 2028 arrives.

What ESSB 6346 Creates

The new law imposes a 9.9% tax on Washington taxable income exceeding a $1,000,000 standard deduction per individual. The tax applies to:

• Individual Washington residents with income exceeding $1,000,000
• Non-resident individuals on Washington-source income exceeding $1,000,000
• Non-grantor trusts on trust income attributable to Washington
• Pass-through entities (partnerships, S corporations, LLCs) where the pass-through income flows to individuals or trusts subject to the tax

The Marriage Penalty Problem

The structure of ESSB 6346 creates a significant marriage penalty. Each individual receives a $1,000,000 standard deduction, which is reasonable on its face. But the statute caps the combined deduction for spouses and state-registered domestic partners at $1,000,000 total — regardless of whether they file jointly or separately.

Two single individuals with $1,000,000 in taxable income each owe zero Washington income tax (each uses their full standard deduction). Two married individuals with the same $1,000,000 each in income share one $1,000,000 standard deduction, leaving $1,000,000 combined taxable income subject to 9.9% — a tax of $99,000.

This marriage penalty is structural and cannot be avoided by filing separately. The statute explicitly treats married couples and domestic partners as a single unit for deduction purposes.

What Counts as "Washington Taxable Income"

The statute defines Washington taxable income broadly. Critically, it requires adding back income that is excluded from federal adjusted gross income — including certain trust income and pass-through entity income. This "add-back" requirement is specifically designed to prevent high-income individuals from sheltering income in federal exclusions that Washington does not recognize.

Sources of income typically included:

• Wages and salary over $1,000,000
• Business income from sole proprietorships
• Pass-through income from partnerships, S corporations, and LLCs
• Capital gains (though the interaction with Washington's existing 7% capital gains excise tax creates a credit mechanism to avoid double taxation)
• Non-grantor trust income retained within the trust

The add-back requirement has significant implications for trusts. Federal law allows certain income exclusions and deductions that Washington's new income tax does not honor, potentially subjecting more trust income to the state tax than expected based on the federal return alone.

The Trust Income Trap

For fiduciaries managing ongoing irrevocable trusts established by deceased Washington residents, the ESSB 6346 trust income provisions require immediate planning consideration.

Non-grantor trusts are separate taxable entities that accumulate income at the trust level before distributing it to beneficiaries. Washington's new income tax applies to non-grantor trusts with Washington taxable income exceeding $1,000,000.

If a trust has $2,000,000 in annual income and retains it at the trust level, $1,000,000 is taxable at 9.9% — a $99,000 annual Washington income tax bill on top of the trust's federal income tax obligations.

The alternative: distribute the income to individual beneficiaries. Each beneficiary receives their own $1,000,000 standard deduction for Washington income tax purposes. A trust with four adult children as beneficiaries and $2,000,000 in income can distribute $500,000 to each, and none of them individually exceeds the $1,000,000 deduction threshold — zero Washington income tax.

This distribution strategy requires trust documents that give the trustee discretion to distribute income to multiple beneficiaries. Trusts with mandatory accumulation provisions or a single beneficiary have fewer options. Trustees of such trusts should consult an attorney about whether the trust terms can be modified under Washington's TEDRA statute to allow more flexible distributions.

Capital Gains Credit: Avoiding Double Taxation

Washington already imposes a 7% capital gains excise tax on long-term capital gains. The new 9.9% income tax potentially creates double taxation on the same gain. ESSB 6346 addresses this by providing a credit mechanism — capital gains subject to the 7% excise tax can generally be credited against the income tax, so the two taxes do not simply stack.

However, the credit mechanism is complex in practice, particularly for trusts and pass-through entities where the capital gains may flow through multiple layers before reaching the individual taxpayer level. Fiduciaries should not assume the credit will always eliminate double taxation without specific analysis of the income structure.

Estate Tax Interaction: The Ongoing Administration Problem

For estates that remain open for extended periods — particularly those with significant ongoing business income or investment income — the new 9.9% income tax adds another layer of tax exposure beginning in 2028.

An estate with $1,500,000 in annual investment income (from bonds, rental properties, and dividends) that is still being administered in 2028 will face:

• Federal income tax on the estate at compressed trust/estate rates (the highest 37% rate kicks in at just $15,000 of estate income)
• Washington's 9.9% income tax on the amount exceeding $1,000,000

This dual burden creates strong incentives to close estates quickly and distribute assets to beneficiaries who can utilize individual tax rates and deductions. Prolonged estate administration beyond 2028 will be significantly more expensive than it is today.

Planning Opportunities Before 2028

The effective date of January 1, 2028 provides a two-year planning window. For individuals and families with income or trust structures that may be affected:

Review trust documents now. If an irrevocable trust lacks income distribution flexibility, consult an attorney about a TEDRA modification to add trustee discretion over income distributions. This is far easier to accomplish in 2026 or 2027 than after the tax takes effect.

Consider trust situs. For trusts with no direct Washington connection (no Washington resident trustee, no Washington property), the Washington income tax may not apply. Washington-source income and Washington residency of the trustee are key factors in the sourcing analysis.

Gift assets before 2028. Washington has no state gift tax. Transferring assets out of the estate and into the hands of multiple beneficiaries now reduces the concentration of income at the trust or estate level.

Model 2028 income projections. Work with a CPA to project what trust and estate income will look like beginning in 2028. If the projections show significant exposure to the 9.9% rate, the time to restructure is now.

The Washington Final Tax & Estate Tax Guide at /us/washington/estate-tax/ covers the state's current tax landscape — the estate tax, the 7% capital gains excise tax, and the new income tax framework — with practical guidance for executors and trustees navigating Washington's increasingly complex tax environment.

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