Estate Tax Planning in Texas

Serving Clients in Houston and the Surrounding Area

The federal estate tax can take a significant bite out of the wealth you leave to your heirs. While recent legislation has increased the amount that can pass free of estate tax, the tax remains a real concern for many families – particularly those with substantial assets, business interests, or real estate holdings. Effective estate tax planning can minimize or even eliminate the estate tax burden on your family, allowing more of your hard-earned wealth to pass to the people and causes you care about.

The Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 brought the most significant changes to the federal estate tax in over a decade. The TCJA roughly doubled the estate tax exemption, dramatically increasing the amount that an individual can pass to heirs free of federal estate tax. However, these increased exemptions are temporary. Unless Congress acts, the TCJA provisions are scheduled to sunset at the end of 2025, which would cut the exemption approximately in half. This sunset creates both urgency and uncertainty for estate tax planning.

Federal Estate Tax Exemption

Under the TCJA, the federal estate tax exemption is $11.7 million per individual and $23.4 million per married couple (these amounts are indexed for inflation and adjusted annually). This means that an individual can transfer up to $11.7 million in assets – during life or at death – without incurring any federal estate or gift tax. For married couples, the combined exemption of $23.4 million provides substantial protection. Any amount transferred in excess of the exemption is taxed at a flat rate of 40%.

While these exemptions are generous, they do not eliminate the need for planning. Individuals and families with assets approaching or exceeding the exemption amount should work with an estate planning attorney to implement strategies that maximize the use of their exemptions and minimize the tax burden on their heirs.

Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion

The lifetime gift tax exemption is unified with the estate tax exemption, meaning that gifts made during your lifetime reduce the amount available to shelter your estate at death. The current lifetime gift tax exemption mirrors the estate tax exemption at $11.7 million per individual.

In addition to the lifetime exemption, the IRS allows you to make annual gifts of up to $15,000 per recipient without using any of your lifetime exemption. This is known as the annual gift tax exclusion. Married couples can combine their exclusions and give up to $30,000 per recipient per year. The annual exclusion is one of the simplest and most effective estate tax planning tools available, as it allows you to transfer wealth to your heirs over time without incurring any gift or estate tax consequences.

Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax is a separate tax that applies to transfers made to individuals who are two or more generations below the transferor – typically grandchildren. The GST tax is imposed in addition to the estate and gift tax, and it is designed to prevent families from avoiding a generation of estate tax by transferring wealth directly to grandchildren or more remote descendants.

The GST tax exemption is currently equal to the estate tax exemption ($11.7 million per individual), and the GST tax rate is a flat 40%. Proper planning can maximize the use of the GST exemption, allowing significant wealth to pass to future generations free of transfer taxes at every level.

Portability

Portability is a provision that allows a surviving spouse to use any unused portion of a deceased spouse’s estate tax exemption. For example, if the first spouse to die uses only $5 million of their $11.7 million exemption, the surviving spouse can elect to add the remaining $6.7 million to their own exemption, for a combined exemption of $18.4 million. Portability is a powerful planning tool, but it is not automatic – the executor of the deceased spouse’s estate must file a timely estate tax return to elect portability, even if no tax is owed.

It is important to note that portability applies only to the estate tax exemption, not to the GST tax exemption. This means that additional planning is needed to maximize the use of both exemptions for families with significant wealth.

Texas Estate Taxes

Texas does not impose a state estate tax, inheritance tax, or gift tax. This is a significant advantage for Texas residents, as many other states impose their own estate or inheritance taxes in addition to the federal estate tax. However, if you own property in a state that does impose a state estate tax, that property may be subject to the other state’s tax regardless of your Texas residency. Proper planning can help minimize exposure to out-of-state estate taxes.

At The Stegall Law Firm, we work with individuals and families throughout Houston and the surrounding area to develop estate tax planning strategies tailored to their specific circumstances. Whether your concern is the current exemption, the potential sunset of the TCJA provisions, or the coordination of federal and state tax planning, we can help you protect your wealth for future generations.