What Are the Tax Implications of Estate Planning in Texas?

If you are a resident of Texas, there’s some good news: Texas has no estate tax or death tax and does not collect inheritance tax. The bad news is that the IRS will still impose a federal estate tax, and the way you plan out your estate will make a huge difference in how much the federal government takes and what you’re able to leave to your beneficiaries. An estate planning attorney in Houston can help you to make the most of your estate and protect it as much as possible.

Understanding Federal Estate Tax

The federal estate tax is basically a type of excise tax. It’s not really taxing the inheritance but the transfer of assets. These estate taxes apply to any estate over a certain amount (the amount changes regularly), and if your estate is worth more than this, the tax amount ranges from 18% to 40%.

Even if your estate is not worth enough to trigger the federal estate tax, however, it’s still very important to have an estate planning attorney help you arrange your estate. Without the help of a qualified attorney, it’s easy to make mistakes that can cause confusion and an undue burden on your loved ones or create a situation where your estate and assets end up not being distributed in the way that you desire. A qualified estate planning lawyer will make sure everything is arranged exactly the way you want. They will also be taking a huge burden off the shoulders of your loved ones in their time of grief, so they can focus on celebrating your life and processing their loss.

Texas Property Transfer Issues

While Texas does not have an estate tax, there can be some issues when it comes to transferring property to your heirs. If you have property of particularly high value, the taxes can become a sudden and unexpected burden, so you want to speak with your estate planning lawyer about strategies for managing these taxes. You may be able to establish trusts that give your beneficiaries money to pay for high property taxes, for example, especially in the initial years after the transfer, or there may be special evaluation techniques that can minimize the liabilities.

The homestead exemption can greatly reduce the tax burden on your estate, but you will need to be sure that you meet the eligibility criteria. Other exemptions are also available for special groups, like disabled veterans, so be sure to talk to a lawyer who understands all the ways that you can safeguard your real estate assets.

Estate Planning to Minimize Taxes

There are many strategies you can take to minimize the effect of federal taxes on your estate, but all of them require strategic advance planning. If you wait too late, your beneficiaries may lose out on much of what you hoped to give them. Talk to your lawyer about the best strategies for you, but here are some of the things you and your lawyer may discuss:

Gifts

One way to reduce the overall size of your estate, perhaps even to get it below the threshold that triggers estate taxes at all, is to give away gifts while you’re still alive. You can give up to $18,000 in 2024 to any single person in a year without tax implications.

This number goes up every year slightly with inflation, so, for example, if you have three children, you could give each of them $18,000 in 2024 and reduce the overall size of your estate by $54,000. You do not have to report this gift, and there are no taxes levied on it. If you go over the amount allowed, however, there are gift taxes that the giver is usually responsible to pay.

If you are married, both you and your spouse can give $18,000, which would allow you to give each of your children $36,000 and would reduce the value of your estate by $108,000. If you start giving gifts now, even if you don’t give the entire amount allowed, you can reduce the overall size of your estate to avoid triggering the higher tax rates or potentially any tax rate at all.

Consider the Alternate Valuation Date

The amount of tax that you’re going to owe will depend on the size of your estate, and the size of your estate may change dramatically over time with rates of inflation, property values, etc. The law allows you to use something called an alternate valuation date, which means that your beneficiaries can choose to pay the taxes on the value of the estate six months after your death rather than at the time of your death.

They must, however, pay everything on either date. They cannot choose to pay tax on some of it on one date and some of it on another. If the beneficiaries sell any of the estate prior to the new alternate evaluation date, they have to pay taxes on the date of the sale. This is or something you will want to discuss with your lawyer and with your family in advance.

Use Trusts

Another way to minimize tax burdens is to create a trust and move some of your property there. At that point, the property no longer belongs to you, and so it is no longer part of your estate. Instead, the “trust” owns those assets and, upon your death, those assets can be transferred to your heirs.

You can only do this with what is known as an irrevocable trust, so called because you are surrendering complete control of that property forever and cannot do anything with it once you have transferred it. They are also revocable trust that have other implications, so talk to your attorney about what’s best.

Consider Life Insurance

If you have a large estate, you may not have considered getting life insurance because your family is unlikely to need it. However, one thing you can consider is getting a life insurance policy large enough to cover the estate taxes that your beneficiaries would otherwise pay. In most cases, the death benefit of a life insurance policy is tax-free. This can be particularly helpful if most of your assets are not liquid and your family would have to have enough cash of their own to pay the tax or would have to sell some of the inheritance to cover it.

Another way to do this is to set up an irrevocable life insurance trust where the trust actually holds your policy and the trustee pays the insurance premiums from the assets of your trust. Upon your death, the trustee will then collect the life insurance and use it to pay for whatever you direct: your funeral expenses, taxes, or simply direct gifts to your beneficiaries.

The above are just some of your options: a lawyer can tell you much more and also help you make smart decisions about what’s best for you and your beneficiaries. Contact Hensley & Krueger, PLLC in Houston, TX now to talk with estate and probate lawyers you can trust.

We proudly serve Houston & all throughout Texas.

Hensley & Krueger, PLLC

5615 Kirby Dr Suite 720,
Houston, TX 77005, United States
Phone: (713) 850 9700

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