Answers to Your Questions about the Estate Tax
One of the primary estate planning concerns for most clients is estate taxes. Indeed, for most people, the main goal of their estate plan is to reduce or eliminate Texas estate tax, if at all possible. The federal estate tax rate is 40%, however, there is an estate tax exemption available. While Texas no longer imposes Texas estate tax, residents need only plan for federal estate taxes. Here is what you need to know.
Q. Is there a state-imposed Texas estate tax?
The answer is no. Texas no longer imposes a separate estate tax at the state level. Therefore, the only estate tax liability Texas residents need to be concerned with is the federal tax. Currently there are 17 states who still impose estate tax on the state level. However, federal estate taxes are still imposed.
Q. How does the federal estate tax exemption work?
The federal estate tax exemption permits an estate with a value less than the exemption amount to be passed on without incurring any taxes. The current exemption amount in 2016 is $5.45 million. This federal tax exemption is “portable,” which means that a decedent’s surviving spouse can use any unused portion of their deceased spouse’s exemption. The unused portion of the exemption is then combined with the surviving spouse’s own exemption.
Q. What happens if you exceed the annual exclusion?
Although the majority of client estates do not exceed the $5.45 million exclusion amount, your estate may be one of the few that does. If the value of your estate exceeds that amount, the estate tax of 40 percent of the amount of the estate that exceeds the exclusion. If you are married you can also take advantage of the unlimited marital deduction also available to married couples. There are also several different steps you can take to avoid estate taxes, through the use of an estate plan.
Can I benefit from the marital deduction?
Married couples can give a gift of an unlimited amount to their spouse. The value of the property gifted to the surviving spouse is deducted from the deceased spouse’s estate. If all assets go to the surviving spouse, then no estate taxes are imposed based on the “marital deduction.” A married couple can essentially protect $10.9 million from federal estate and gift taxes. This is commonly referred to as the lifetime credit.
Q. What is the “generation skipping” tax?
Another type of estate tax is referred to as the “generation skipping” tax, which is a tax assessed on any property passed on to a generation that is two or more levels below that of the decedent. What that means is, when you pass property on to your grandchildren, instead of your children, the Internal Revenue Service will impose a tax on that transfer. The generation skipping tax also applies to a transfer to someone who is unrelated to you and who is 37 ½ years or more younger than you.
How can a generation-skipping trusts help?
The purpose of a General Skipping Trust is to reduce or completely eliminate estate taxes on transfers made to successive generations. This is achieved by holding the assets in trust and distributing the trust funds in a pre-determined way to each successive generation. In this way, the entire amount of the trust is protected from estate taxes with each passing generation. A common misconception is that Generation Skipping Trusts only benefit wealthy families, however most families can benefit from this particular type of estate planning.
Is it better to leave gifts instead of inheritances?
Another way to avoid Texas estate taxes is by transferring property to your grandchildren or other heirs as gifts instead of inheritances. This can not only reduce the size of your estate, but also decrease the amount of taxes imposed on your estate upon your death. For instance, grandparents can give their grandchildren up to $14,000 each year (or $28,000 if they combine their gifts) to each grandchild, without incurring a gift tax. There are several options, actually. You can make an outright gift, pay health care or education expenses, put the money in a custodial account, or transfer the money into a trust.
If you have questions regarding Texas estate taxes, or any other estate planning needs, please contact experienced estate planning attorneys at The Vermillion Law Firm, LLC for a consultation either online or by calling us toll free at (972) 366-7201.