As a result of Governor Jay Inslee signing S.B. 5096 on May 4, 2021, Washington state will begin imposing a 7 percent tax on certain long-term capital gains beginning January 1, 2022. For a detailed overview of the new law, see Washington Enacts New Capital Gains Tax for 2022 and Beyond.

As a general matter, taxpayers subject to this new tax are individuals—not entities. Individuals who hold beneficial interests in certain pass-through and disregarded entities will incur tax to the extent of their interest in such entities.

Trusts are just one of the pass-through and disregarded entity-types affected. This article looks at the application of the new Washington capital gains tax to various trust structures.

For all trusts identified as "grantor trusts" under Internal Revenue Code §§671 through 678, the individual grantor of any such trust will be subject to the new Washington capital gains tax. This applies to both revocable and irrevocable trusts for which the grantor is determined for income tax purposes to be the owner of trust assets.

An individual grantor of a trust taxed as a nongrantor trust who transfers completed gifts will not be subject to the capital gains tax associated with such nongrantor trust assets. Instead, individual beneficiaries of nongrantor trusts to whom distributable long-term capital gains are allocated will be subject to the tax.

• Note that an individual grantor who makes an incomplete gift transfer of long-term capital gain property to a nongrantor trust is subject to the capital gains tax upon the trust's sale of such contributed property.

There are planning opportunities that should be considered prior to January 1, 2022. To the extent long-term capital gain recognition can be accelerated to occur prior to the end of 2021, the new tax can be avoided entirely.

If accelerating gain is not possible or is undesired, a taxpayer may consider changing residency/domicile to a different state. If an individual is not a resident of Washington and has established legal domicile in different state, the capital gain that would otherwise be due on intangible assets can be avoided.

Taxpayers may also wish to consider establishing and gifting to irrevocable trusts for children and other beneficiaries that start out as grantor trusts but which may become nongrantor trusts or which are nongrantor trusts from the creation. Of course, other considerations should be analyzed, such as income tax "burn" of a grantor trust (if available under then federal tax law). A bona fide gift to either a grantor trust or a nongrantor trust, supported by a qualified appraisal, should not result in treatment of the transfer as a sale from the grantor to the trust, and therefore the capital gains tax will be avoided.

Upon a taxable disposition by the nongrantor trust of a gifted asset, and allocation of the resulting gain, each qualifying trust beneficiary will receive the benefit of the $250,000 deduction, rather than having only a single $250,000 deduction being available to the grantor. While this strategy may not eliminate the tax altogether, it may minimize the overall tax due—in some cases, use of multiple deductions for multiple trust beneficiaries may eliminate the tax.

In any year when the capital gains tax is levied against a grantor or the trust's beneficiaries and there are insufficient deductions to eliminate such tax, charitable planning strategies may be considered to reduce any tax imposed. However, there are certain requirements and limitations on the charitable deduction to the Washington capital gains tax.

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