Estate planning is an important part of ensuring the financial security of you and your loved ones upon your death. One aspect of estate planning that is often overlooked is the Estate and Gift tax. How will taxes affect your Texas estate? Like many Texans, you may be asking yourself this question. It is important to understand the implications of estate tax, because the tax rate can be as high as 40%. This hefty tax bill must be paid before your estate assets can pass to your beneficiaries.
While the estate and gift tax applies to estates with assets greater than approximately $13 million (for married couples, the exemption amount is double) families should think through how their estates are valued carefully. This is especially true for families who own businesses, investors with large or broad holdings, and individuals with large life insurance policies. These circumstances could bring you closer to the Estate and Gift tax limits than you think. Also be aware that the Estate and Gift tax is scheduled to be reduced by half at the end of 2025. This means there could be some planning opportunities for you to take now before the rules change. Overall, it’s important to understand some basic information about how they work and how they will impact your Texas estate, so you can make informed decisions.
Estate Tax
The Estate Tax, sometimes also called the “death tax,” is a federal tax that’s levied on a deceased person’s assets. Before these assets can be distributed to beneficiaries, any federal taxes owed will be deducted from the estate. In 2023 estates that are valued at $12,920,000 or less, are exempt from the federal estate tax. This exemption amount is up from the 2022 amount, which was $12,060,000. However, in 2026, the estate base exemption amount is set to drop back down to $5,000,000 (adjusted for inflation).
Texas and 37 additional states in the U.S. do not levy estate taxes at the state level.
While Texans don’t have to worry about paying estate taxes to the state, the federal estate taxes will apply. With the exemption amount drastically dropping in 2026, locking in the higher exemption rate might be very important to you. Careful planning with an experienced estate planning attorney is highly recommended.
Gift Tax Planning
Gifts made during your lifetime and assets transferred to your beneficiaries or heirs after your death are added together to determine whether your estate is subject to an Estate and Gift tax. However, you can make a gift during your lifetime that will not count for these purposes. This is known as an annual gift exclusion. The Gift Tax is a federal tax levied when one person gives money or property to someone else while receiving nothing in return. The person giving the gift is responsible for paying this tax. In 2022, any gift of $16,000 or less was exempt from paying federal gift tax. As of January 1, 2023, this exemption amount has increased to $17,000 per gift.
This means that you can gift any number of persons up to $17,000 each during 2023 without paying gift tax, up to the lifetime exclusion amount of $12,920,000. Certain types of gifts, such as education and medical expenses, among others, are always exempt from gift taxes.
Currently, only the state of Connecticut charges gift tax, so Texans needn’t worry about a state gift tax burden. For Texans looking to lock in the federal estate tax exemption amounts before they drop drastically in 2026, gifting now might be a prudent strategy. An estate planning attorney can help you decide what strategies and estate planning tools are best for you.
Inheritance Tax
Inheritance Tax is a state levied tax that a recipient pays when they inherit estate assets when someone dies. The federal government does not charge inheritance tax. The good news for Texans is that our state does not have an inheritance tax. However, there are currently six states that do, so if you are a Texan and plan to leave any portion of your estate to a beneficiary who resides in another state, they could be subject to taxes on the amount that they receive. Additionally, it’s important to note that in the states that impose inheritance taxes, the beneficiary’s relationship to the decedent matters. For example, spouses are always exempt from paying inheritance taxes. Immediate relatives, such as children, are usually exempt or pay some of the lowest inheritance tax rates. Non-related beneficiaries typically are required to pay the highest tax rates.
Inheritance taxes are levied on the amount of the estate assets that a beneficiary receives. The tax rates vary by state. Inheritances below certain amounts may be exempt from inheritance tax depending on the state. As of 2022, the six states that charge an inheritance tax are:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Note that this list can change, as individual state tax laws change.
Plan Now To Pay Less Later
Careful planning with an experienced estate planning attorney can greatly reduce the tax burden that will be placed upon your estate and possibly your beneficiaries. Gifting to your beneficiaries during your lifetime can be a solution to paying hefty estate taxes upon your death but it isn’t always that simple. Many people are concerned that their beneficiaries aren’t ready to manage the gifts properly, for example if the intended recipient is a child at the time of the gift. In this situation, establishing an irrevocable trust for the child’s benefit allows you to make the gift and retain control. You can set the rules on how the trust assets are to be invested and when they can be distributed. Oftentimes these irrevocable trusts will be excluded from the calculation of your estate tax liability.
When creating a gifting strategy, it’s also important to analyze the types of assets that you are gifting, as opposed to those that will remain in your possession and become part of your estate upon your death. If you gift highly appreciated assets (such as shares of stock or real estate), the gifts are valued at your cost basis, meaning that when your beneficiary sells the asset, they may have to pay hefty capital gains tax. However, highly appreciated assets that are received as part of an estate inheritance, are passed along at a stepped-up basis, reset to the current market value, reducing your beneficiaries’ taxable burden when they sell the asset.
Generally, cash and property with little appreciation are better for gifting, while highly appreciated assets are better to transfer as part of your estate. If you are concerned about the estate tax, highly appreciated assets are often good candidates as they can be transferred in a way that can reduce your overall estate tax liability.
Seek Assistance From A Qualified Estate Planning Attorney
This article has provided some basic information about the federal and state taxes that could affect your estate’s assets. The rules, exemptions, and specifics can get much more complex depending on your unique circumstances. It’s always recommended that you attain the services of a qualified estate planning attorney who can help implement strategies for reducing taxes as you pass your assets to your loved ones. Furthermore, tax laws are ever-changing, so regular estate plan reviews might be in order.
The tax implications for your estate and your beneficiaries must be considered in estate planning. In doing so, you can plan ahead to ensure that more of your legacy goes to those you love.
Steven C. Holman, is an estate planning attorney with over 14 years experience. His law firm, Holman Law LLP, is located in the Merit Tower in Dallas, Texas. If you reside in or around the Dallas/Fort Worth area and would like assistance with your estate planning, we would love to hear from you. You can reach our office by calling (972) 474-7828 or by visiting our website.
