Articles Posted in Estate Tax

As control of the federal government changes, sometimes every two years, the tax laws often change as well. Recently, new tax laws have gone into effect, which may significantly affect many Texans’ management of their assets and estate. A recently released legal trade publication discusses some of the recent tax changes and how they may affect your estate planning.

The most significant changes to tax law that involves estate planning involve adjustment of the estate tax and the gift tax. As of 2023, the combined exemption amount from the gift and estate taxes has increased by nearly $ 1 million. With the new tax numbers, single persons are now entitled to give or pass on to their heirs up to $12,920,000 without incurring any estate or gift tax burden. A married couple can exempt $25,840,000 in this same manner.

This change may affect how some Texans construct and manage their estate because trusts, non-liquid holdings, and other financial measures may not be necessary to reduce the tax burden of your heirs upon your death. The exemption is the highest it has ever been and is set to reduce in 2026. With proper advice and counsel, Texans with significant assets may be able to arrange a “lifetime gift” to an heir, locking in the favorable tax exemption while it is part of the law.

Many worry that their estate will be left with significant taxes when they pass. Fortunately, Texas is one of 38 states that do not have an estate tax. However, residents may still be subject to federal estate tax laws. Other states’ inheritance laws may apply to a Texas resident. Thus, it is advisable that those who live in Texas consult with an experienced trust and estate planning lawyer.

What is an Estate Tax

An estate tax, commonly referred to as the “death tax,” is a tax applied on the estate of a deceased person before their money passes on to their beneficiaries or heirs. In contrast, the government takes an inheritance tax after money or items have been passed on to the deceased’s heirs.

Congress debated many changes to the federal estate and gift tax laws. While most of the proposals would have changed the amount a person could gift during their lifetime, the Build Back Better Act (H.R. 5376) did not present significant modifications to the estate and gift tax exclusion amount.

Federal Estate Tax

Those who pass in Texas will not owe any estate tax to the state. However, these individuals may owe money to the federal government. In 2022, the federal estate tax applies to estates worth $12.06 million. Thus, if an estate surpasses the applicable value, it may be subject to a federal estate tax. Moreover, the federal estate tax is portable for married couples. In other words, if the couple takes the appropriate legal steps, they will not have to pay a tax on up to $24.12 million when both spouses pass. However, it is critical that couples consult with an attorney to ensure that they do not waive their rights to these benefits.

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While there are many intricacies to estate planning, married couples may utilize some different strategies when crafting their estate plan. This may include assessing the couple’s tax liability and deciding who to gift their assets and property to if they were both to pass away. And there are many tax benefits that spouses can take advantage of—both federally and in Texas—during their lives and after one spouse has passed away. Below are common questions about spousal trusts and estate plans and explanations to these potential queries.

What Tax Differences Are There for Married Couples?

One tax advantage for married couples in Texas is they are given a higher estate tax exemption limit. This means the total value of their estate may be higher before they are required to pay an estate tax—as compared to a single individual. In 2022, a single individual must pay an estate tax if their estate is valued at over $12,060,000. However, a married couple must pay the estate tax if their estate is more than $24,120,000. It is important to note that this exemption limit is set to decrease in 2026 to $10,000,000 per married couple.

When individuals are crafting their estate plan, they often think about the younger loved ones in their lives—be it children, nieces and nephews, or grandchildren. They may want to leave property, financial assets, or family heirlooms to these minors. However, because minors usually lack the legal capacity to own property, there are different rules in place for gifting to those under 18 years old. Because of this, it is important for individuals to reach out to experienced estate planning attorneys who can help them navigate the process and ensure they are complying with federal and Texas estate planning laws.

How to Include Children in an Estate Plan

Because minors cannot legally inherit property, individuals wishing to include their children in their will must take additional steps. Texas estate law provides for minors who are given assets and property through an estate plan. Under the Texas Uniform Gifts to Minors Act, children’s assets are held in a managed account until they reach the age of 21. While individuals are usually only considered a minor until they turn 18, the law considers a minor anyone under 21 years old. In the will, the parents must designate a custodian who will manage the assets for the child’s benefit until they are no longer a minor. While this may be upsetting to some children, the point of this law is to ensure the funds are not irresponsibly spent. Instead, with the supervision and assistance of a custodian, there is a much higher chance the funds will be sensibly spent—if used at all—until the minor is older.

However, the requirements of the Uniform Gifts to Minors Act do not mean that the funds given to minors cannot be touched until they are 21 years old. The custodian is given a lot of discretion in utilizing the funds—so long as it is for the minor’s benefit. For example, if the minor needs funds to pay for college or assistance with transportation, the custodian can either purchase items for them or pay tuition on their behalf. Since the custodian has a lot of discretion, individuals should not make this decision lightly: who do they trust implicitly, would communicate well with their children, and make the best—and responsible—decisions on their behalf.

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Every year, Congress passes new legislation that impacts Americans and their daily lives. One of these aspects is when Congress passes bills in estate planning law—this changes Texan’s strategies for planning for the future and what type of taxes they will have to play. Even for those bills that are not ultimately passed, it is critical to understand what these laws would do to estate plans, as they—or similar legislation—may be passed in the future. Below are various proposals made by Congress, their effect if passed, and steps Texans should take with their estate plan—whether these ideas become law or not.

What Are Some Current Federal Proposals to Estate Law?

In the past year, Congresspeople have introduced several pieces of legislation that would have significantly altered the way people create estate plans. However, these proposals were not passed.

A new year often brings new changes. Along with New Year’s resolutions that individuals make to become healthier, improve their lifestyle, and be kinder, others may resolve to create or update their estate plan. Because of this, it is important to know the federal and Texas estate planning laws that impact estate plans. Some of these laws have provisions that changed at the beginning of 2022, so even individuals with estate plans in place may want to alter them so they can benefit from these changes. Below are some of the key tax concepts and changes that Texans should pay attention to in crafting their estate plan.

Increases to the Annual Gift and Lifetime Estate Tax Exclusion Amount

In a very notable change, the federal estate tax exemption amount has increased. If an estate is valued over the exemption limit, then the estate will be taxed before assets are distributed to beneficiaries. In 2021, if an estate was worth less than $11.7 million—or $23.4 million for a married couple—then the estate would not be taxed. However, in 2022, the exemption limit has increased to $12.06 million—or $24.12 million for a married couple.

A federal bill working its way through Congress will have dramatic implications for Texans and their estate plans. Once the bill becomes law, some of the estate planning techniques that have assisted Americans with sizeable estates will no longer be available. Fortunately, there is still time for Houston residents to take advantage of several favorable laws still in place.

Changes to the Gift and Estate Tax

Perhaps the most notable change to the law will be a sweeping reduction in the unified credit amount. The unified credit amount for a married couple is currently $12 million. This means that married estate holders can make a combined total of $12 million tax-free transfers in the form of lifetime gifts and transfers upon death.

There are many stresses that come along with moving: saying goodbye to friends and family, figuring out the logistics of the move, and settling into a new environment. However, many people do not think about amending their will or estate plan when moving to a new state. While this may not seem critical, many estate planning laws vary, depending on the state of residence. Below are common questions and explanations that individuals have about estate planning when they are relocating to Texas.

Why Do  I Need to Change My Estate Plan?

When moving to a new state, it is important to amend a will and other estate planning documents. However, many people—despite hearing this advice—are confused about why this is necessary. Although a person’s will is still generally valid after moving, there tend to be state-specific laws and regulations that may impact the estate plan.

While drafting their estate plan, many individuals do not consider the taxes that will be taken from their assets after their passing. Because every state has different tax rates—and there are both estate tax and inheritance taxes to worry about—it can be confusing for Texans to determine what taxes apply to them. Beyond this, once people discover the estate and inheritance taxes their beneficiaries will be forced to pay, they often ask about strategies to limit their tax implications. Below are common questions and explanations about not only estate and inheritance taxes, but also options to reduce a person’s overall tax liability.

What Estate Planning Taxes Should I Be Worried About?

When drafting an estate plan, individuals should be aware of both estate and inheritance taxes. An estate tax is based on the value of the deceased’s estate. Additionally, the tax is paid from the assets of the deceased’s estate. On the other hand, inheritance taxes are paid by the beneficiaries of the estate based on the amount of assets they receive.

People are often confused about whether an estate tax—also known as an inheritance tax—will apply to their property after their passing. While the federal regulations surrounding the estate tax often change, Houston estate planning attorneys are knowledgeable in calculating the value of the asset, along with the taxes the deceased’s family will have to pay. Having this knowledge ahead of time will prepare the family financially and emotionally for when the person passes. Below are common estate tax questions and the answers to these problems.

What is An Estate Tax?

An estate tax is a tax levied on the estate of a recently deceased person before the money passes onto their heirs. However, estate taxes are only applicable to estates that fall above a certain monetary threshold. Some states have estate taxes too; however, Texas is not one of those states. Therefore, Texans will only have to worry about the federal estate tax on their properties. The federal estate tax applies for estates worth more than $11.7 million. For married couples, the rate is doubled—meaning, a married couple’s estate must be more than $23.4 million to have to pay the estate tax.

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