Millionaire Growth in Dallas Spurs Estate Tax Concerns

estate tax As of 2013, there were 600,000 new millionaires reported in the United States.  This is the fast growth in millionaires in the country since the early 90s.  Most of these millionaires are being sourced by oil and technology.  As a result, Dallas has become the home of this record-breaking millionaire growth.  In fact, the number of millionaires in Dallas jumped 20 percent, making the city number one in millionaire growth.  Houston comes is second place, with millionaire growth of 18 percent.

The new pattern of wealth creation

New York remains the nation’s capital in terms of millionaires.  There are approximately 894,000 millionaires in the city accounting for $3.2 trillion in the country’s wealth.  However, in recent reports, it appears that the location of wealth in the U.S. is now shifting along with the growth of energy and technology. “A new pattern of wealth creation is emerging,” the report said. “The emergence of fast-growing smaller cities indicates U.S. wealth is shifting to a broader mix of geographies and industries.”

Who tops the wealth list in Texas?

A report released by Forbes in September 2014 indicated that the daughter of Walmart founder Sam Walton once again tops the list of wealthiest North Texans. Forbes puts her worth at $35.2 billion.  That is twice the reported wealth of Michael Dell, the next Texan on the state’s list.  In all, there are 20 Dallas-Fort Worth billionaires on the list.  With all of this enormous wealth, the issue of estate taxes can easily become a legitimate concern in estate planning.  The good news is that a large portion of each person’s estate can pass to heirs and beneficiaries without being subject to estate taxes.  Federal laws have created what is known as the “unified credit,” which includes both the federal estate and gift tax exclusions.

The federal estate tax exclusion

The current (2016) estate tax exclusion is $5.45 million.  What does that mean? Basically, you can leave up to $5.45 million of your estate to your heirs and they will not be required to pay estate taxes on that amount.  This estate tax exclusion is “portable,” which means that if you are married and you do not use all of your exclusion, the remainder of that exclusion can be used by your spouse.

The gift tax exclusion

Generally speaking, when property ownership is transferred between individuals, the IRS imposes a gift tax.  Not all gifts are taxed, though.  There are some exceptions including medical expenses and tuition that you may pay on behalf of someone else.  Gifts that you give to your spouse are not taxed, nor are gifts to charity or political organizations.  However, for those gifts that are not automatically exempt, there is an annual exclusion amount.  Currently the exclusion amount is $14,000 per recipient, or $28,000 if a married couple combines their individual exclusions.  In other words, you and your wife could give your son a gift of up to $28,000 without incurring any gift tax.

What happens to the portion of an estate that exceeds the annual exclusion?

For these millionaires in Dallas whose estate easily exceed the $5.45 million lifetime exclusion amount, they will be facing estate taxes of 40% of that excess amount.  Those individuals can still reduce their estate tax liability through proper estate planning.  Some common methods for reducing your potential estate tax is through gifts, trusts, and life insurance policies.  The marital deduction is another popular way.

Proper use of the marital deduction

Federal tax laws also provide a benefit for married couples.  They are allowed to give a gift of an unlimited amount to their spouse.  This provides a way for married couples to transfer property to each other, while avoiding federal estate or gift taxes.  When the first spouse passes away and their property is transferred to the surviving spouse, that amount is deducted from the deceased spouse’s gross estate.  As long as certain requirements are met, the amount of the marital deduction is unlimited.

Using a trust to transfer ownership of assets

In order to take full advantage of the unified credit, married couples should create a “bypass trust.”  This means that, when the couple creates their individual wills, they will stipulate that the full amount of their unified lifetime credit be transferred to a bypass trust.  The income from these assets flows directly to the surviving spouse.  Once both spouses have passed away, the ownership of the remaining assets is transferred to the named beneficiaries and the bypass trusts are dissolved.

If you have questions regarding estate taxes, or any other estate planning needs, please contact The Vermillion Law Firm, LLC either online or by calling us toll free at (888) 567-5745.