How to Minimize or Avoid Estate Tax in Texas

When planning for the future, it’s important to consider estate tax, especially when you intend to pass on significant assets. Understanding how these taxes work, the current laws in Texas, and how they might affect your estate is crucial to ensuring that your loved ones are not burdened with unexpected tax liabilities.

What Is Estate Tax?

Taxes on an estate are imposed on the total value of a deceased person’s assets before distribution to their heirs. This tax is calculated based on the net value of the estate, which is the total value of all assets minus any debts, expenses, and allowable deductions. These taxes are typically levied by both the federal government and, in some cases, by individual states.

Federal Estate Tax

In the United States, federal taxes on estates are a concern for those with large assets. As of 2024, the federal exemption is $13.61 million per individual. This means that estates valued below this amount are not subject to federal taxation. Any value above the exemption is taxed at a rate of up to 40%.

It’s important to remember that the federal exemption is subject to change. It is often adjusted for inflation and can be modified by new legislation. Additionally, the current exemption is set to expire on December 31, 2025, which could reduce it to approximately $5 million per individual, adjusted for inflation, unless Congress takes action to extend or modify it.

Texas Estate Tax Laws

Unlike some other states, Texas does not impose a state-level tax on estates. This is a significant advantage for Texans, as it means that estates in Texas are only subject to federal taxation, with no additional state taxes applied to the estate’s value. This makes Texas a particularly favorable state for estate planning, especially for individuals with significant assets.

Planning to Minimize Taxes

Even though Texas does not have a state estate tax, careful planning is still essential to minimize the impact of federal taxes on your estate. Some strategies to consider include:

1. Gifting During Lifetime: One effective way to reduce the size of your taxable estate is by making gifts to your heirs during your lifetime. The annual gift tax exclusion for 2024 allows you to give up to $18,000 per year, per recipient, without incurring tax. This can significantly reduce the value of your estate, potentially bringing it below the federal exemption threshold.
2. Setting Up Trusts: Trusts can be powerful tools in planning for taxes. By placing assets in a trust, you can reduce the taxable value of your estate while still maintaining some control over how those assets are managed and distributed. Trusts such as irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs) are commonly used in estate tax planning.
3. Leveraging the Marital Deduction: The unlimited marital deduction allows you to transfer an unlimited amount of assets to your spouse without incurring estate tax. This can be a valuable tool in reducing or eliminating tax liability for married couples, especially when combined with portability, which allows a surviving spouse to use the unused portion of the deceased spouse’s federal exemption.
4. Charitable Contributions: Making charitable donations as part of your estate plan can also reduce the taxable value of your estate. Charitable contributions are fully deductible, which can help lower or eliminate the tax burden.
5. Reviewing and Updating Your Estate Plan: Regularly reviewing and updating your estate plan is crucial, especially as tax laws change. Working with a qualified estate planning attorney ensures that your estate plan remains effective in minimizing taxes and protecting your assets.

Conclusion

Planning for taxes is a critical component of a comprehensive estate plan, particularly for individuals with large estates. While Texas does not impose a state-level tax on estates, understanding and planning for federal taxation is essential. By utilizing strategies such as gifting, trusts, and charitable contributions, you can significantly reduce the tax burden on your heirs.

Taking the time to plan now can ensure that your estate is passed on to your loved ones with minimal tax liability, allowing them to benefit from your legacy fully. If you don’t feel it is necessary yet to plan for estate tax with your assets, Texan Wills and Trusts offers the best online estate planning in Texas. Click an option below to get started.

If you think you would benefit from estate tax planning, we recommend you contact Book Law Firm to schedule a consultation. To do so, just click the link below: